Suppose the current price is $50 per share. The stock price might go up to $80 per share or go down to $20 per share.
a. Can you derive the payoff of purchasing an European stock PUT option with exercise price $50 for one share?
b. Come up with a risk free portfolio that consists of the stock and the PUT option?
c. Based on the risk free portfolio, derive the no arbitrage premium for the European stock PUT option?