What is the current price of a european put option

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A stock sells for $50 today. Next year there is a 10% chance the stock will sell for $25 and a 90% chance the stock will sell for $75. The one-year risk-free rate is 10%.

(a) What is the current price of a European put option on the stock where the option expires in one year and has an exercise or strike price of $50?

(b) What is the expected return to holding the stock for one year?

(c) What is the expected return to holding the option for one year? Is this different from the expected return to holding the stock? Why or why not?

Reference no: EM133060323

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