Assume that you hold an American put option on NetPlus Communications. The option has a strike price of $50 and expires in one year. Netplus has utterly failed and its stock price has dropped to zero. It has no hope of recovering. The risk-free rate of return is 10%.
a. If you exercise your put in one year, what will be the payoff? What is the present value of this payoff?
b. If you exercise your put now, what will be your payoff? What is the present value of this payoff?