   Chapter 18.A, Problem 1P Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Summary Introduction

To determine: The price of put option.

Introduction:

Option is a contract to purchase a financial asset from one party and sell it to another party on an agreed price for a future date. There are two types of options, which are as follows:

• An option that buys an asset called call option
• An option that sells an asset called put option
Explanation

E Company has a stock on the put option with an exercise price of $30 and there is 9 months period for expiration. The risk-free rate is 5 percent. Even a call option was written on the Company’s stock with the similar exercise price and expiration period as the put option. The stock price of the E Company is$45 and the call option price is $18.99. The formula to compute the price of put option is as follows: Put option=VP+ XerRFt Where, V refers to the value of option P refers to the current price of stock X refers to the exercise price of option rRF refers to the risk-free rate t refers to the number of periods Compute the price of put option: Note: The value of “e” is 2.718281828. Put option=VP+ XerRFt=$18

Explanation

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