What should be price of option based on risk neutral pricing

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Reference no: EM131359149

We are interested in pricing a 1-year put option on cisco with a strike price of K=100. Currently CISCO is trading at 80 and the risk free rate is 5% per annum. In addition we assume that (i) CISCO will not pay any dividend and (ii) there are no other derivatives that are trading including other call or put options.

a) Suppose that we follow a Binomial model and CISCO may either appreciate by 50% or depreciate by 25%.

What should be the price of the option based on replication?

What should be the price of the option based on risk neutral pricing?

Reference no: EM131359149

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