This flashcard is just one of a free flashcard set. See all flashcards!
205
5.The current price of a non-dividend-paying stock is $40. Over the next year it is expected to rise to $42 or fall to $37. An investor buys put options with a strike price of $41. What is the value of each option? The risk-free interest rate is 2% per annum with continuous compounding.
A.$3.93
B.$2.93
C.$1.93
D.$0.93
A.$3.93
B.$2.93
C.$1.93
D.$0.93
Answer: D
The formula for the risk-neutral probability of an up movement is
In this case r=0.02, T= 1, u=42/40=1.05 and d=37/40=0.925 so that p=0.76 and the value of the option is (0.76×0+0.24×4)e-0.02×1=0.93
The formula for the risk-neutral probability of an up movement is
In this case r=0.02, T= 1, u=42/40=1.05 and d=37/40=0.925 so that p=0.76 and the value of the option is (0.76×0+0.24×4)e-0.02×1=0.93
Flashcard info:
Author: CoboCards-User
Main topic: Finance & Investment
Topic: Derivatives
Published: 27.10.2015