Question

the stock price jumps twice in a given year. if it jump up, it goes up by 10%, if it goes down, it goes down by 20%. the stock is currently trading at 70 and pays no dividends. the annual interest rate is 4%, compounded semi-annually. find the current price p0on a 1 year european put option with strike price 65.

Answer 1

The value of European Put option is 9.

What is Put option?

Under derivative securities market an option whose value depend on the underlying item where delivery is not made generally & net settlement done by squaring off the position and depends on the volatility of market.

Put Option is a bearish school of thought where investor thinks the market will decline & the value will be below the exercise price.

In hedging the position of investor make certain not better, therefore the value of put option lies between zero or difference value among the spot price & exercise price with discounting annual market interest rate:

Spot = 70

Exercise = 65

Future Price = 70 × 80% = 56

Rate = 4 % Compounded semi annually.

Value of Put = Spot Price - Exercise Price

                     = 56 - 65

                     = 9  

Thus the value of put option will be 9 (65-56).

To know more about Put option refer:

brainly.com/question/24016129

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