Question

The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $28. Assume the risk-free rate is 10%. What, to the nearest cent, is the price of a European put option with a strike price of $33?

Answer 1

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DERIVATIVES BINOMIAL - Microsoft Excel (Product Activation Failed) View Add-Ins - 2x Σ AutoSum : A Dr General Wrap Text Merge & Center - Fill ZI TU $ % , . Insert Delete Format Conditional Format Cell Formatting as Table Styles Styles Clear File Home Insert Page Layout Formulas Data Review % Cut Calibri -11AA = = = Ea Copy Paste Format Painter BI U D- DA Clipboard Font AU15 - fix AL AM AN AO AP PRICE INCREASE = PRICE DECREASE = Sort & Filter Editing Find & Select Alignment Number Cells AQ AS AT AU AV AW AX AY AZ 5 (36-30)/30 = (28-30)/30 = I AR 20.00% -6.67% Hoc vouw PAYOFF IF PRICE INCREASE = IF PRICE DECREASE = MAX (33-36, 0] = MAX [33-28, 0] = 0.00 (PUT WILL NOT BE EXERCISED) 5.00 (PUT WILL BE EXERCISED) 11 12 13 14 15 16 17 18 NOW TO GET 5% RETURN [ ANNUAL RATE = 10%, 6 MONTHS RATE = 5%] WE CAN USE FOLLOWING EQUATION TO FIND RISK NEUTRAL RPROBABILITY RISK FREE RATE = PROB(INCREASE)* (20%) + PROB(DECREASE)(-6.67%) 5% = (X)(20%) + (1-x)(-6.67%) 5% = (X)(20%) - 6.67% + (X)(6.67%) 11.67% = (X)(26.67%) 0.4375 PROBABILITY OF INCREASE 1-X = 0.5625 PROBABILITY OF DECREASE X= 19 20 21 22 23 KOM Rea SO THE RISK NEUTRAL : VALUE OF PUT OPTION VALUE OF PUT OPTION = (PROB(INCREASE)* PAYOFF + PROB(DECREASE)* PAYOFF)/(1+RISK FREE RATE) VALUE OF PUT OPTION = ((0.4375*0) + (0.5625*5))/(1+0.05) VALUE OF PUT OPTION = 2.6786 ANSWER VALUE OF PUT OPTION = 2.68 Sheet2 RISK NEUTRAL Sheet3 Sheet4 Sheets Sheet6 Sheet7 BINOMIAL BS ferences |901 120% 1a e 9 $ 35 0 + 12:06 20-11-2019 DOR . * ENG C