Problem:
The current price of a non-dividend-paying biotech stock is $140 with a volatility of 25%. The risk-free rate is 4%. For a three-month time step:
Required:
Question 1: What is the percentage up movement?
Question 2: What is the percentage down movement?
Question 3: What is the probability of an up movement in a risk-neutral world?
Question 4: What is the probability of a down movement in a risk-neutral world?
Use a two-step tree to value a six-month European call option and a six-month European put option. In both cases the strike price is $150.
Note: Please show how you came up with the solution.