The price of a non-dividend paying stock is $19 and the price of a three-month European call
Question:
The price of a non-dividend paying stock is $19 and the price of a three-month European call option on the stock with a strike price of $20 is $1. The risk-free rate is 4% per annum. What is the price of a three-month European put option with a strike price of $20?
Strike PriceIn 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.
Step by Step Answer:
In this case and ...View the full answer
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 Corporate Finance questions
-
The price of a stock is $40. A six-month European call option on the stock with a strike price of $30 has an implied volatility of 35%. A six month European call option on the stock with a strike...
-
A four-month European call option on a dividend-paying stock is currently selling for $5. The stock price is $64, the strike price is $60, and a dividend of $0.80 is expected in one month. The...
-
The volatility of a non-dividend-paying stock whose price is $78, is 30%. The risk-free rate is 3% per annum (continuously compounded) for all maturities. Calculate values for u, d, and p when a...
-
Examples using activity-based costing generally show that traditional costing systems ________ high-volume, less complex products and ________ low-volume, complex products undercost; overcost...
-
Options have a unique set of terminology. Define the following terms: (1) Call option; (2) Put option; (3) Exercise price; (4) Striking, or strike, price; (5) Option price; (6) Expiration date; (7)...
-
Assume that youve just inherited $350,000 and have decided to invest a big chunk of it ($250,000, to be exact) in common stocks. Your objective is to build up as much capital as you can over the next...
-
Kimberley, Kerry and Kevin, partners trading as Triple K Traders have a partnership deed which includes the following provisions. 1. Salaries are to be allowed: Kimberley, \($54000;\) Kerry,...
-
Pan Corporation purchased 80 percent of the outstanding voting common stock of Sal Corporation on January 2, 2011, for $600,000 cash. Sal's balance sheets on this date and on December 31, 2011, are...
-
A 45-year-old man presents to the Emergency Department with a fever, widespread rash, and confusion. His only past history of note was Sydenham's chorea and a number of recent dental extractions....
-
As a senior analyst for the company you have been asked to evaluate a new IT software project. The company has just paid a consulting firm $100,000 for a test marketing analysis. After looking at the...
-
"The early exercise of an American put is a trade-off between the time value of money and the insurance value of a put." Explain this statement.
-
What is meant by a protective put? What position in call options is equivalent to a protective put?
-
The correlation between the number of visitors to the state of Florida and the number of shark attacks since 1990 is 0.946. Should the number of visitors to Florida be reduced in an attempt to reduce...
-
One football season Dominos Pizza, a corporate sponsor of the Washington Redskins (a football team), offered to reduce the price of its $8 medium-size pizza by $1 for every touchdown scored by the...
-
When the price of ketchup rises by 18 percent, the demand for hot dogs falls by 2 percent. a. Calculate the cross-price elasticity of demand. b. Are the goods complements or substitutes? c. In the...
-
Kean University Professor Henry Saffer and Bentley University Professor Dave Dhaval estimated that if the alcohol industry increased the prices of alcoholic beverages by 100 percent underage drinking...
-
In the first quarter of 2019, the output gap in the United States was 0.8%. Make a prediction about what you think the output gap will be in the second quarter of 2019. Explain your reasoning.
-
The FDIC is extremely concerned with risk management in banks. High-risk banks are more likely to fail and cost the FDIC money. The FDIC regularly examines banks and rates them using a system called...
-
Prove the identity. cosh(x + y) = cosh x cosh y + sinh x sinh y
-
During the month, services performed for customers on account amounted to $7,500 and collections from customers in payment of their accounts totaled $6,000. At the end of the month, the Accounts...
-
Consider a four-month put futures option with a strike price of 50 when the risk-free interest rate is 10% per annum. The current futures price is 47. What is a lower bound for the value of the...
-
A futures price is currently 60 and its volatility is 30%. The risk-free interest rate is 8% per annum. Use a two-step binomial tree to calculate the value of a six-month European call option on the...
-
In Problem 16.12 what value does the binomial tree give for a six-month European put option on futures with a strike price of 60? If the put were American, would it ever be worth exercising it early?...
-
Blair, CPA, uses the cash receipts and disbursements method of reporting. In Year 7, a client gave Blair 100 shares of a listed corporation's stock in full satisfaction of a $5,000 accounting fee the...
-
What is driving the increase in the price of healthcare services today? Explain why it is important to know the scope of business being reviewed when using financial statements. Explain the content...
-
What is a discount? How do you activate discounts? Activate discounts: Assign a discount account: 3. Discounts Given - What is the account type and detail type for this account?
Study smarter with the SolutionInn App