Problem
BC Company stock is trading for 50 in a two-time period environment so that each relevant time period is 6 months. The stock might increase by exactly 20% in just one period or perhaps in both periods. Of course, the stock might not increase in either period. If the stock price does not increase in a given period, it will decline by 16.67 percent in that particular period. One-year options with an exercise price equal to 60 are trading on this stock. The annual riskless rate of return equals 0.
i. What is the value of a put in this environment?
ii. What is the probability (risk-neutral probability) implied in this framework that the BC Company stock price will exceed 40 when options expire?