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What is the price of a put option with a strike price of $50 and six months

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What is the price of a put option with a strike price of $50 and six months to maturity when the stock price is currently trading at $45? Assume the stock-price variance is 0.5 and the risk-free rate is 5 percent.


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. Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
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Using the BlackScholes option pricing model The...View the full answer


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Sufiyan Ahmed Tariq
I am a Chartered Accountant and an Associate Public & Finance Accountant. I also hold a bachelors of Commerce degree. I have over 8 years of experience in accounting, finance and auditing. Through out my career, I have worked with many leading multinational organisation. I have helped a number of students in studies by teaching them key concepts of subjects like accounting, finance, corporate law and auditing. I help students understanding the complex situation by providing them daily life examples. I can help you in the following subject / areas: a) Accounting; b) Finance; c) Commerce; d) Auditing; and e) Corporate Law.
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Introduction To Corporate Finance

Introduction To Corporate Finance

ISBN: 9781118300763

3rd Edition

Authors: Laurence Booth, Sean Cleary

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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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