Answer:
The price of an European Put Option = $4.03
Explanation:
Hi, you have to use a formula for the evaluation of an European put option on an underlying, which does not pay dividends. This equation follows the Black & Scholes-Merton model.
This is the model for a put option
N(-d1) is the cumulative normal distribution function, calculated as follows.
for N(-d2) yoou have to make the following calculation
where:
K = Opcion strike price
N = Standard normal cumulative distribution function
r = Risk Free interest rate
σ = Volatility of the underlying
S = Price of the underlying
t = Time to option´s expiry
Here are the result of all the above calculations
S= $79.00
K= $77.00
r = 6% annual
sigma =25% annnual
t = 0.67 years (That is 8/12 to turn months into years )
d1 = 0.42
d2 = 0.22
N(-d1) = 0.335913098
N(-d2) = 0.41312295
e^(-rt) = 0.960789439
p(s,t)= - 79(0.3359...) + 77(0.9607...)(0.413122...) = $4.03
Notice the excel spreadsheet attached.
best of luck .