The current price of an asset is $75. A put option on the asset with a strike price of $100 expires one year from now. It is possible, without arbitrage, for this put option to be priced at $24 today.

Question

Quizplus · Accepted Answer

The intrinsic value of the put option is the difference between the strike price ($100) and the current price of the asset ($75), which is $25. However, the actual price of the option also includes time value, which accounts for the possibility of the asset price decreasing further. Therefore, a price of $24, slightly below the intrinsic value, is possible due to factors like time value, volatility, and interest rates.

The Current Price of an Asset Is $75