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A one-year American put option on a non-dividend-paying stock has an exercise price of $18. The current

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A one-year American put option on a non-dividend-paying stock has an exercise price of $18. The current stock price is $20, the risk-free interest rate is 15% per annum, and the volatility of the stock is 40% per annum. Use the DerivaGem software with four three-month time steps to estimate the value of the option. Display the tree and verify that the option prices at the final and penultimate nodes are correct. Use DerivaGem to value the European version of the option. Use the control variate technique to improve your estimate of the price of the American option.
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Related Book For  book-img-for-question
Fundamentals of Futures and Options Markets

Fundamentals of Futures and Options Markets

ISBN: 978-0132993340

8th edition

Authors: John C. Hull

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A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price. For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses. It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.

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