A stock is currently trading at $100.In each month,the stock will either increase in price by a factor of $u = 1.10$ or fall by a factor of $d = 0.90$ .The risk-free rate of interest per month is 0.1668% in simple terms,i.e. ,an investment of $1 at the risk-free rate returns $1.001668 after one month.What is(a)the price of a 100-strike,three-month European put option,and(b)the price of a 100-strike,two-month European put option?
A)$7.20 and $5.41,respectively.
B)$7.20 and $5.08,respectively.
C)$5.08 and $7.70,respectively.

Question

Quizplus · Accepted Answer

To calculate the prices of European put options, we use the binomial option pricing model. This model considers the possible paths the stock price can take and discounts the payoffs back to present value using the risk-free rate. The difference in the number of months (three for the first option and two for the second) affects the number of steps in the binomial tree and thus the calculation of the option prices. The specific prices given in choice B suggest a calculation that accurately reflects the binomial model's outcomes for these particular parameters (stock price movements, strike price, and risk-free rate) over the specified periods.

A Stock Is Currently Trading at $100 u=1.10u = 1.10u=1.10 Or Fall by a Factor Of

A Stock Is Currently Trading at $100 $u = 1.10$ Or Fall by a Factor Of