Consider a 1-year European put (right to sell) with a strike price of 52 on a stock whose current price is 50. We suppose that there is only time step at which the stock moves either up by 20% or down by 20%. We also suppose that the risk free interest rate is 5%. What is the value of this option?
2026-04-03 02:54:46.1775184886
financial calculus put option
210 Views Asked by Bumbble Comm https://math.techqa.club/user/bumbble-comm/detail At
1
There are 1 best solutions below
Related Questions in CALCULUS
- Equality of Mixed Partial Derivatives - Simple proof is Confusing
- How can I prove that $\int_0^{\frac{\pi}{2}}\frac{\ln(1+\cos(\alpha)\cos(x))}{\cos(x)}dx=\frac{1}{2}\left(\frac{\pi^2}{4}-\alpha^2\right)$?
- Proving the differentiability of the following function of two variables
- If $f ◦f$ is differentiable, then $f ◦f ◦f$ is differentiable
- Calculating the radius of convergence for $\sum _{n=1}^{\infty}\frac{\left(\sqrt{ n^2+n}-\sqrt{n^2+1}\right)^n}{n^2}z^n$
- Number of roots of the e
- What are the functions satisfying $f\left(2\sum_{i=0}^{\infty}\frac{a_i}{3^i}\right)=\sum_{i=0}^{\infty}\frac{a_i}{2^i}$
- Why the derivative of $T(\gamma(s))$ is $T$ if this composition is not a linear transformation?
- How to prove $\frac 10 \notin \mathbb R $
- Proving that: $||x|^{s/2}-|y|^{s/2}|\le 2|x-y|^{s/2}$
Related Questions in FINANCE
- Compute the net present value of this project in dependance of the interest rate p.
- Maximizing profit when demand is a power function
- How do I calculate if 2 stocks are negatively correlated?
- Why does the least risky portfolio have large weight on the eigenvectors with small eigenvalues?
- FM Actuary question, comparing interest rate and Discount rate
- Monthly effective interest rate to 6-month effective interest rate
- Annual interest rate compounded monthly to monthly effective interest rate
- Withdrawing monthly from a bank for 40 years
- PMT equation result
- Fair value of European Call
Trending Questions
- Induction on the number of equations
- How to convince a math teacher of this simple and obvious fact?
- Find $E[XY|Y+Z=1 ]$
- Refuting the Anti-Cantor Cranks
- What are imaginary numbers?
- Determine the adjoint of $\tilde Q(x)$ for $\tilde Q(x)u:=(Qu)(x)$ where $Q:U→L^2(Ω,ℝ^d$ is a Hilbert-Schmidt operator and $U$ is a Hilbert space
- Why does this innovative method of subtraction from a third grader always work?
- How do we know that the number $1$ is not equal to the number $-1$?
- What are the Implications of having VΩ as a model for a theory?
- Defining a Galois Field based on primitive element versus polynomial?
- Can't find the relationship between two columns of numbers. Please Help
- Is computer science a branch of mathematics?
- Is there a bijection of $\mathbb{R}^n$ with itself such that the forward map is connected but the inverse is not?
- Identification of a quadrilateral as a trapezoid, rectangle, or square
- Generator of inertia group in function field extension
Popular # Hahtags
second-order-logic
numerical-methods
puzzle
logic
probability
number-theory
winding-number
real-analysis
integration
calculus
complex-analysis
sequences-and-series
proof-writing
set-theory
functions
homotopy-theory
elementary-number-theory
ordinary-differential-equations
circles
derivatives
game-theory
definite-integrals
elementary-set-theory
limits
multivariable-calculus
geometry
algebraic-number-theory
proof-verification
partial-derivative
algebra-precalculus
Popular Questions
- What is the integral of 1/x?
- How many squares actually ARE in this picture? Is this a trick question with no right answer?
- Is a matrix multiplied with its transpose something special?
- What is the difference between independent and mutually exclusive events?
- Visually stunning math concepts which are easy to explain
- taylor series of $\ln(1+x)$?
- How to tell if a set of vectors spans a space?
- Calculus question taking derivative to find horizontal tangent line
- How to determine if a function is one-to-one?
- Determine if vectors are linearly independent
- What does it mean to have a determinant equal to zero?
- Is this Batman equation for real?
- How to find perpendicular vector to another vector?
- How to find mean and median from histogram
- How many sides does a circle have?
The stock can move up to 60 or move down to 40.
Let the price of the option be $t$. The option value at maturity is 0 if the stock goes up, and $52-50*(1-20\%) = 12$ if the stock goes down.
You can make this option by a portfolio of stock and risk-free bond. Let you invest $s$ of this stock now and $b$ in risk free bond.
You have to solve $$\left\{\begin{array}{l} 60s + 1.05b = 0\\ 40s+ 1.05b = 12 \end{array}\right.\\\left\{\begin{array}{l} s=-0.6\\ b=34.285714 \end{array}\right.\\$$
I.e. with this set of $s$ and $b$, the value of portfolio at maturity is the same as that of the option. Therefore the price of this option should also be the same as the present value of this portfolio, which is $34.285714 - .6\times 50$.