Fundamentals of Financial Manageme...
Solutions
Fundamentals of Financial Manageme...
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
The value of call option is $9.59 with a strike price of $46 and expiries in 6 month period. The stock price at present is $50 and annual risk-free rate is 5.5 percent.
The formula to compute the price of put option is as follows:
Where,
V refers to the value of call 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.
Explanation
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