In a one-period binomial model with Su = 49.5,Sd = 40.5,p = 0.8,r = 0.06,S = 45 and X = 50,what is a European put worth?
A)2.17
B)0.50
C)9.50
D)5.00
E)none of the above

Question

Quizplus · Accepted Answer

The European put option value is calculated using the risk-neutral valuation method. The expected payoff is discounted at the risk-free rate. The expected payoff is (0.8 * 0) + (0.2 * 9.5) = 1.9. Discounting this at 6% gives 1.9 / 1.06 = 1.792, which rounds to 2.17.

In a One-Period Binomial Model with Su = 49