Question

Q9. You are doing research on a biotech firm. You think there are three scenarios for the drug depending on the results from the clinical trials:

1. Not effective; ii. Effective; iii. Super effective

with probabilities of              i 30%; ii. 40%; iii. 30%

respectively.

You believe the stock with be worth           i. $50; ii. $100; iii. $150

under those scenarios eventually.

Q9a. What is the STDEV today? (3 points)

Q9b. A preliminary trial was NOT very promising, which eliminates the chance of iii (ie “super effective”). What is the stock price reaction (what is the new price) upon the release of the trial result? (3 points)

Q9c. What is the price of a PUT option with strike of 100 BEFORE and AFTER the news release? (4 points)

Answer 1

9 a)

scenerio	Stock price(x)	probability (P)	P*x	(X -x)	(X-x)^2	P(X-x)^2
Not effective	$ 50	30%	15	$ 50	2500	750
Effective	$ 100	40%	40	0	0	0
super effective	$ 150	30%	45	$ 50	2500	750
total			X = 100			1500

mean = 100$

Standard deviation = sqrt of P(X - x)^2

= sqrt of 1500 = 38.729

9 b)

here III trail was abscent. assume super effective equal to zero

Not effective	$ 50	30%	15
Effective	$ 100	40%	40
super effective	$ 150	0	0
total			X = 55

New price will be $55

9c)

the price of a PUT option with strike of 100 BEFORE and AFTER the news release = ?

when price $100 or after put option price is zero

when price $ 55 means before $ 100 the put option price is 45.