The price of an asset will either rise by 25% or fall by 40% in 1 year,
Question:
The price of an asset will either rise by 25% or fall by 40% in 1 year, with equal probability. A European put option on this asset matures after 1 year.
Assume the following:
• Price of the asset today: 100
• Strike price of the put option: 130
• Put option premium: 7
• Annual effective risk free rate: 3%
Calculate the expected profit of the put option.
(A) 12.79
(B) 15.89
(C) 22.69
(D) 27.79
(E) 30.29
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E The 1year payoff of the put o...View the full answer
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