Option valuation: Consider a put option with a strike price of $40, which expires in one year. The risk-free rate of interest is 8 per cent. The current underlying share price is $20. Without arbitrage, which of the following is a possible price for the put option?

Question

Quizplus · Accepted Answer

The put option's intrinsic value is $20 (strike price $40 - current price $20). The option price must be at least this intrinsic value, so $25 is a possible price.

Option Valuation: Consider a Put Option with a Strike Price