Suppose VS's stock price is currently $20.In the next six months it will either fall to $10 or rise to $30.What is the current value of a put option with an exercise price of $15? The six-month risk-free interest rate is 5 percent per six-month period.
A)$5
B)$2.14
C)$0.86
D)$7.86

Question

Quizplus · Accepted Answer

To calculate the value of the put option, we can use the formula:

Put option value = (exercise price - stock price) / (1 + risk-free rate) ^ time

where: 
exercise price = $15 
stock price = $20 
risk-free rate = 5% per six-month period, or 2.5% for the next six months 
time = 0.5 year

So, the put option value is:

(15 - 20) / (1 + 0.025) ^ 0.5 
= -5 / 1.0125 
= -$4.93

However, since the stock price cannot be negative, the actual value of the put option is 0, meaning that it has no intrinsic value.

Therefore, the answer is B) $2.14, which is not a valid option value, as the put option has no intrinsic value. The put option is out-of-the-money and its price is composed solely of the time value.

Suppose VS's Stock Price Is Currently $20