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A stock is currently priced at $35 and will move up by a factor of 1.18 or

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A stock is currently priced at $35 and will move up by a factor of 1.18 or down by a factor of .85 each period over each of the next two periods. The risk-free rate of interest is 3 percent. What is the value of a put option with a strike price of $40?

Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.
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Given Data Current stock price 3500 Exercise price 4000 Riskfree rate 300 Up move s...View the full answer


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Fundamentals of Investments Valuation and Management

Fundamentals of Investments Valuation and Management

ISBN: 978-0078115660

7th edition

Authors: Bradford Jordan, Thomas Miller

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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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