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Quiz+V+practice - Quiz V Practice Problems Econ 435 Fall...

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Quiz V Practice Problems Econ 435 Fall 2001 1) The Risk-Free Rate is 5% A stock is currently worth $100. Each period the stock will increase or decrease by 25%. There exists a put option on this stock, with an $80 strike price. The put option expires two periods in the future. What is the price of this put option? 2) The risk-free rate is 5%. Stock XYZ has a price of $50. A call option on XYZ expires in one year, has a strike price of 55, and a price of $3. What is the price of a put option on XYZ that expires in one year and has a strike price of 55? (hint form a risk-free portfolio and its return must be the risk free rate. Solutions: 1) The Risk-Free Rate is 5% A stock is currently worth $100. Each period the stock will increase or decrease by 25%. There exists a put option on this stock, with an $80 strike price. The put option expires two periods in the future. What is the price of this put option? Stock Price 156.25 125 100 93.75 75 56.25 Put Option Price Max(80-156.25,0) = 0 P u P Max(80-93.75,0) = 0 P d Max(80-56.25,0)= 23.75 What is P u ?
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