A stock with a current price of $67 has a put option available with a strike pri
ID: 2721426 • Letter: A
Question
A stock with a current price of $67 has a put option available with a strike price of $65. The stock will move up by a factor of 1.31 or down by a factor of .84 over the next period and the risk-free rate is 3 percent. What is the price of the put option? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
A stock with a current price of $67 has a put option available with a strike price of $65. The stock will move up by a factor of 1.31 or down by a factor of .84 over the next period and the risk-free rate is 3 percent. What is the price of the put option? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Explanation / Answer
Answer Current stock Price $67 Put Option Strike Price $65 d 0.84 u 1.31 R 1+.03 =1.03 Pu = 85.15 Pd = 54.6 P = R-d/u-d P= 1.03-0.84/1.31-0.84 P= 0.404255 Probability of price decrease = 1-0.404255 = 0.595745 Price of Put option = Pup+Pd(1-p)/R = 85.15*0.404255-54.60*0.595745/1.03 = 1.84
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