Chapter 03 · Section 3.1

Binomial Pricing Question 3

Stock XYZ costs 110. There is a call option and a put option listed on this stock, both with an exercise price of 100. There is a 50% probability that the stock could go up to a level of 143 and a 50% probability that the stock could go down to a level of 99. The risk free interest rate is 10%. evolution of the stock price

What will be the value of the put given these hypotheses?

a) -1
b) -0
• c) -0.50
  No. No. Your calculation is nearly correct except that you have not taken into account the discount of 0.05. (Calculated on the basis of the 10% interest rate covering the period in question.) Discount .50 back to the present value.
  d) -0.00/0.44
  e) -0.46/99999
  f) +0.45

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