Question

The current price of a continuous-dividend-paying stock is $100 per share. Its volatility is given to be 0.30 and its dividend yield is 0.03. The continuously-compounded, risk-free interest rate equals 0.06. Consider a $95-strike European put option on the above stock with three months to expiration. Using a one-period forward binomial tree, find the price of this put option. (a) $3.97 (b) $4.38 (c) $4.70 (d) $4.97 (e) None of the above.

Answer 1

Date Calculation of Price goes up and goes. down factors in the binominal tree modle would be as under: wo 0.03% 0.25 +0.30 10.25 = 1.1706 own 00:03 x0.25-0.30 .25=0.8672 Hence the possible Prices Of Stocks. Usily. a one - period binomial tree would be. Soup = slou - 1.17068100 = 117.06 s.down - dso) - 0.8672x 100 = 86.72 of Price moving UD. Calculation " P - - of Probability 1 itp.3 10:25 - - 0.4626 Hence the Price of Put option would be. -0.06X/4 (95-86 72 (1-8.4626) UP - 4.38 There for value of put option $ 4.88. option (b) is the is Equial to correct