A stock is currently selling for $50. The stock price could go up by 10 percent or fall by 5 percent each month. The monthly risk-free interest rate is 1 percent. Calculate the price of an American put option on the stock with an exercise price of $55 and a maturity of two months. (Use the two-stage binomial method.)
A)$5.10
B)$3.96
C)$4.78
D)$1.19

Question

Quizplus · Accepted Answer

The correct answer is A because the price of the American put option is $5.10. The two-stage binomial method is a numerical method for pricing options that takes into account the possibility of early exercise. In this case, the stock price could go up by 10 percent or fall by 5 percent each month, and the monthly risk-free interest rate is 1 percent. The exercise price of the put option is $55, and the maturity is two months. Using the two-stage binomial method, we can calculate the price of the put option as $5.10.

A Stock Is Currently Selling for $50