Suppose that Bigco is currently trading for $100 per share. We know that in one year Bigco stock will sell for either $150 per share (?ogood day??) or for $75 per share (?obad day??). No other prices are possible, and the stock does not pay any dividends. The riskless interest rate is 5 percent, so a bond worth B1 next year sells for B0 = B1/(1 + r) today. Stocks, bonds, and options can all be bought or sold, long and short, without any transaction costs.
(a) What is the value of a European call option with a strike price of $100 and expiration in one year?
(b) What is the value of a European put option with a strike price of $100 and expiration in one year?