Question

calculate the price of a put option

I have an asset that can be sold for 200 mil in the market. If in one year depending on the state of the economy the price can either go up to 400 mil or down to 100 mil how could i determine the price of the put option to prevent loss?

Answer 1

price of sale (strike price)=   $200   million
value of put option = Strike price - Spot rate on Expiration      
      
if up    $400   million
VP = 200-400 = 0      
it can not be negative      
      
If down   $100   million
VP = 200-100=   $100   million
      
Probability seems to be equal. so probability = 0.5      
Value of put option = (probability * VP at up)+(probability*VP at down)      
(0.5*0)+(0.5*$100 million)      
$50   million  
      
So value of put option is    $50   million