Widget Corporation's stock price will increase by 25% or decrease by 20% each year. The current stock price is $100 and annual interest rates are 5%.
a. What is the price of a one-year European put option with an exercise price of $90? What are the intrinsic value and the time value?
b. What is the price of a one-year European call option with an exercise price of $90? What are the intrinsic value and the time value?
c. Is your answer to a) and b) consistent with put-call parity?
d. What is the price of a two-year European call option with an exercise price of $90?