The current price of the StarLine Inc. stock is $500. In each of the next two years, this stock price can either go up by 12% or go down by 5%. The stock pays no dividends. The one-year risk-free interest rate is 2% and will remain constant.
a) Using the Binomial Model, calculate the price of a two-year European put option on StarLine Inc. stock with a strike price of $450.
b) Using the put-call parity, calculate the price of a two-year European call option on StarLine Inc. stock with a strike price of $600.
c) Which option would you like to invest in? Explain.
