The arbitrage-free price of a put option is:

Question

Quizplus · Accepted Answer

The arbitrage-free price of a put option is given by the maximum of 0 and K-S, where K is the strike price and S is the current stock price. In this case, K=35 and S=42, so the put option has a payoff of max(0, 35-42)=-7. Therefore, the arbitrage-free price of the put option is max(0, -7)=0.

However, since the question gives answer choices, we need to check which answer is closest to zero. The closest answer choice is C, $8.41.

The Arbitrage-Free Price of a Put Option Is