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The current price of a non-dividend-paying biotech stock is $140 with a volatility of 25%. The risk-free rate is 4%. For a three-month time step:
a) What is the percentage up movement?
b) What is the percentage down movement?
c) What is the probability of an up movement in a risk-neutral world?
d) What is the probability of a down movement in a risk-neutral world? Use a two-step tree to value a six-month European call option and a six-month European put option. In both cases the strike price is $150.
Please explain your answer.
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