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
d) -0.00/0.44
e) -0.46/99999
f) +0.45
There is the same probability that the value of the put at the end of the following period will by 0 or 1. Don't forget to discount the value of the put, given the 10% interest rate.
The value of the put is: (1/1.1) x (0.5 x 0) + (0.5 x 1) = 0.45.