What is the value of an option on a risk-free asset? Specifically, consider a European put...

What is the value of an option on a risk-free asset? Specifically, consider a European put option with one year to expiration and strike price of $110 written on a one-year zero coupon bond with face value $100 and yield-to-maturity 2%. What will be the option premium today (P_0)? (After you answer this question, consider whether an option on a risky asset will have a higher or lower premium, all else equal.)

A. It's P_0 = 110-100 = 10.
B. It's P_0 = 110-100/1.02 = 12.
C. It's P_0 = (110-100)/1.02 = 9.8.
D. It's P_0 = 100-100/1.02 = 2.

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Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

ANSWER : C

jeff jeffy answered 2 years ago

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