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Find what would have to pay in today market for the option

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Reference no: EM132959242

ErenCo is an up-and-coming stone quarry company. A recent report, reflecting the general sentiment of all market participants, projected the following prices and probabilities for ErenCo stock on Aug. 20, 2021:

Probability 1/3 1/2 1/6
Stock Price $15 $10 $6

For each of the following questions, be sure to show all of your work.

Problem 1: According to the EMH, what would you expect the market price of ErenCo stock to be today?

Problem 2: Nancy, an investor in ErenCo, decides to buy a put option on ErenCo stock with a strike price (exercise price) of $9 which expires on Aug. 20. What would she have to pay in today's market for this option? In general, what determines the price an investor will have to pay for an option?

Reference no: EM132959242

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