[Below are student comments on a similar homework assignment used in past years.]

Part N : Put-Call parity relation
call + PV(exercise price) = Put + stock price

call + PV(exercise price) =$3.333 (from part K) + 85/1.05 = 84.29
put + stock price = 4.29 (from part M) + 80 = 84.29

h) I got p = 10.  I think this may be where I got off track.  I used this formula 0.15p + .05 +.05p = 1.050 because the stock could increase by 15% and could drop by 5%

J) use p=10 to get $70

K) PV($70) = 66.67 not the 3.33 that you posted.

The formula of Part H is the same as part G , except the right hand side is 1.05 instead of 1.12.

The formula is :
P x (1+ 15%) + (1-P)x(1- 5%)=1.05
==> P x 1.15 + (1-P) x 0.95 = 1.05
==> 1.15P + 0.95 - 0.95P=1.05
==> P=0.5

P (The probability of a rise in the stoc price)have to be <=1.

Or you can use the formula P x 15% + (1-p) x(-5%)=5%, you will get the
same answer P=0.5

[NEAS: Yes]

Just a note: I personally don't like the formula

expected return = p*ru + (1-p)*rl

where ru is the return for the up case, and rl is the return (lose) for the down case.  Because you have to REMEMBER that rl is negative.

instead, I like (1+expected return) = p*(1+ru)+(1-p)(1+rl) better.

I'm pretty sure from the text that C and E are 0.  It makes sense that the options are worthless in these situations.  They are not intended to be negative, right?  Anyone have any thoughts?

[NEAS: Correct]

The price of an option is non-negative, since you don't need to call if you wouldn't make any money.  You are never forced to call, hence the name option.

when you ask for Call+, do you mean the payoff amount or is it the price of the call option, since you describe the answer as either in section B of the list

I interpreted B as the price that the option is worth, which would be the price of the stock minus the strike price ($7)

[NEAS: Correct. At maturity, the final stock price is known. If it is more than the strike price, the value of the call option is the stock price minus the strike price.]