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Basic Question 4 of 8
Continue with the previous question. Assume a stock price is $55 and in the next year it will either rise by 20% or fall by 16%. The risk-free interest rate is 5%. A put option on this stock has an exercise price of $60. Determine its price.
User Contributed Comments 4
| User | Comment |
|---|---|
| yly14 | calculation for pi is the same for put or call. "d" accounts for the decrease in stock price, not the amount in-the-money of call or put. |
| AusPhD | 3.33 + 60/1.05 - 55 = Put price |
| jd2442424 | Can also use: n = (p_ - p+) / (S+ - S_) PV(TV) = (n * s+ - p+ * 0) / (1 + r)^t p0 = PV(TV) - so * n This would be easier if the 62.3 used n correctly. |
| RAMOST | Put call parity is the fastest way |
I used your notes and passed ... highly recommended!
Lauren
Learning Outcome Statements
describe and interpret the binomial option valuation model and its component terms;
describe how the value of a European option can be analyzed as the present value of the option's expected payoff at expiration;
CFA® 2025 Level II Curriculum, Volume 5, Module 32.