The current stock price of West Inc. is $25. You know there will be big moves of the stock price in the coming six months. The stock price will either increase 15% or decrease 20% in three months and increase $30 or decrease 20% in the next three months. The risk-free interest rate is 15% per year.
a. Using the risk neutral approach, calculate the price of a 6-month call option on West’s stock that has an exercise price of $27.
b. Using the replication portfolio approach, calculate the price of a 6-month put option on West‘s stock that has an exercise price of $27.