In a one-period binomial model with S_u = 49.5,S_d = 40.5,p = 0.8,r = 0.06,S = 45 and X = 50,what is a European put worth? A)2.17 B)0.50 C)9.50 D)5.00 E)none of the above

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Quizplus · Accepted Answer

The European put option price is calculated using the risk-neutral valuation formula: P = e^(-r) * [(1-p) * max(X - S_d, 0) + p * max(X - S_u, 0)]. Substituting the given values, P = e^(-0.06) * [(0.2) * max(50 - 40.5, 0) + (0.8) * max(50 - 49.5, 0)] = 2.17.

In a One-Period Binomial Model with Su = 49

In a One-Period Binomial Model with S_u = 49