The stock price of Bravo Corp. is currently $105. The stock price a year from no
ID: 2764734 • Letter: T
Question
The stock price of Bravo Corp. is currently $105. The stock price a year from now will be either $175 or $70 with equal probabilities. The interest rate at which investors invest in riskless assets is 6%. Using the binomial OPM, the value of a put option with an exercise price of $150 and an expiration date 1 year from now should be worth __________ today.
PLEASE SHOW ALL STEPS, THANK YOU!
The stock price of Bravo Corp. is currently $105. The stock price a year from now will be either $175 or $70 with equal probabilities. The interest rate at which investors invest in riskless assets is 6%. Using the binomial OPM, the value of a put option with an exercise price of $150 and an expiration date 1 year from now should be worth __________ today.
PLEASE SHOW ALL STEPS, THANK YOU!
A.) $44.24 B.) $43.00 C.) $45.67 D.) $45.06Explanation / Answer
Solution:
The strike price = 150 and hence given equal probabilities hence
C=?
S=150 Two options one is 175 and 70 and probabilities are .5 and .5
hence if the price goes to 175 then there wont be any exercise and C= 0 and if it falls to 70 then the C = 80
hence .5*0 +80*.5 = 40 hence C = 40 +4.24
= $44.24 hence the answer is option A
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