Non-dividend paying stock XYZ is trading at $20. The risk free rate is 2%. The minimum price of a four-month American put option at strike $22 is
A) $0
B) $1.27
C) $1.89
D) $2.00

Question

Quizplus · Accepted Answer

The minimum price of an American put option can be determined by its intrinsic value, which is the maximum of (strike price - stock price, 0). Here, the intrinsic value is max(22 - 20, 0) = $2. This is because American options can be exercised at any time, and thus, their value cannot be less than the immediate exercise value.

Non-Dividend Paying Stock XYZ Is Trading at $20