FREE Trial

Return to Problem 37. What will be the payoff to the put, Pu, if the stock goes

Question:

Return to Problem 37. What will be the payoff to the put, Pu, if the stock goes up? What will be the payoff, Pd, if the stock price falls? Value the put option using the risk neutral shortcut described in the box on page 533. Confirm that your answer matches the value you get using the two-state approach?

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Answer rating: 66% (12 reviews)

We first calculate the risk neutral probability that ...View the full answer


answer-question-section
Answered By
tutor-profile-image
Joseph Mwaura
I have been teaching college students in various subjects for 9 years now. Besides, I have been tutoring online with several tutoring companies from 2010 to date. The 9 years of experience as a tutor has enabled me to develop multiple tutoring skills and see thousands of students excel in their education and in life after school which gives me much pleasure. I have assisted students in essay writing and in doing academic research and this has helped me be well versed with the various writing styles such as APA, MLA, Chicago/ Turabian, Harvard. I am always ready to handle work at any hour and in any way as students specify. In my tutoring journey, excellence has always been my guiding standard.
4.00+ 1+ Reviews 10+ Question Solved
Related Book For  book-img-for-question
Essentials of Investments

Essentials of Investments

ISBN: 978-0078034695

9th edition

Authors: Zvi Bodie, Alex Kane, Alan Marcus

See More Books
Question Posted:
See More Questions

Related Video

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.

Students also viewed these Accounting questions

Untamed Leadership A Journey Through The Instincts That Shape Us 1st Edition - ISBN: 0982018541 - Free Book