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 difference between the strike price and the current stock price, if this difference is positive. Here, the intrinsic value is $22 - $20 = $2. This is because American options allow for the exercise at any time up to expiration, making the option worth at least its intrinsic value. Other factors like time value or implied volatility are not directly calculable from the given information but are always non-negative, meaning the price could be higher than the intrinsic value but not lower. Therefore, the minimum price is $2.

Non-Dividend Paying Stock XYZ Is Trading at $20