Question

A single put option contract may give a holder the right to sell 1 share of XYZ stock at a strike price of $100/share at the expiry date in 1 year. The borrowing/lending rate is 5%. Suppose that the current stock price is 95 and 1 year later, the stock price is either $80 or $110. Calculate this option price, round to 4 decimal places Selected Answer:

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

B Current stock Price Strike Price Risk free rate Maturity (years) in one year: Up Price (u) Down Price (d) 110 80 - amonFAMOFOña Risk-neutral Probability P(u) P(d) 0.66 0.34 Payoff in one year: Price at expiry $80.00 $110.00 Payoff of Put $20.00 $0.00 Value of Put option $6.4235

Cell reference -

в Current stock Price Strike Price Risk free rate Maturity (years) in one year: Up Price (u) Down Price (d) 95 100 0.05 1 110 80 Risk-neutral Probability P(u) =(C2*EXP(C4*C5)-C8)/(07-08) =1-C11 12 P(d) 13 Payoff in one year: Price at expiry 80 110 Payoff of Put =MAX($C$3-B16,0) =MAX($C$3-B17,0) 16 17 18 | 19 20 Value of Put option =(C16*C12+C17*C11)/EXP(C4*C5)

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.