A futures price is currently 40 cents. It is expected to move up to 44 cents or down to 34 cents in the next six months. The risk-free interest rate is 6%. What is the value of a six-month put option with a strike price of 37 cents?
A. 3.00 cents
B. 2.91 cents
C. 1.16 cents
D. 1.20 cents
C
The probability of an up movement is (1-d)/(u-d). In this case u is 1.1 and d is 0.85 . The probability of an up movement is therefore 0.15/0.25=0.6 . The option pays off zero if there is an up movement and 3 cents if there is a down movement. The value of the option is therefore 0.4×3×e-0.06×0.5= 1.16 cents.
You might also like to view...
The focus of attention of this leadership style usually is on work progress, work procedures, and roadblocks that are preventing goal attainment.
A. Laissez-faire B. Authoritarian C. Participative D. Paternalistic
The four stages of the management process are plan, perform, evaluate, and communicate
Indicate whether the statement is true or false
Marketers first identify consumer needs and then provide products that satisfy those needs. This practice is referred to as ________
A) the stakeholder orientation B) the marketing concept C) Total Quality Management D) the production orientation E) the marketing mix
There is absolutely no difference on an economic basis between a stock dividend and a stock split
Indicate whether this statement is true or false.