Use the information for the question(s)below.
The current price of KD Industries stock is $20.In the next year the stock price will either go up by 20% or go down by 20%.KD pays no dividends.The one-year risk-free rate is 5% and will remain constant.
-Using risk-neutral probabilities,the calculated price of a one-year put option on KD stock with a strike price of $20 is closest to:
A)$2.00.
B)$2.15.
C)$1.45.
D)$2.40.

Question

Quizplus · Accepted Answer

The risk-neutral probability of the stock price going up is calculated using the formula: p = (1 + r - d) / (u - d), where r is the risk-free rate, u is the up factor, and d is the down factor. Here, u = 1.2, d = 0.8, and r = 0.05. The put option price is then calculated using the risk-neutral probabilities and discounted at the risk-free rate.

Use the Information for the Question(s)below