Question

In: Finance

Assume spot rate for Euro is $1.1900 and the three-month forward rate is $1.1710. What is the minimum price that a six-month American put option with a striking price of $1.220 should sell for in a rational market?

Assume spot rate for Euro is $1.1900 and the three-month forward rate is $1.1710.

What is the minimum price that a six-month American put option with a striking price of $1.220 should sell for in a rational market? Assume the annualized six-month Euro rate is 0.5 percent.

O $0.0489

O $0

O $0.0300

O $0.0389

Expert Solution

The option "$0.0489" is right option.

Put option give the opportunity to sell but no obligations to the stock on the maturity of stock price expiration date.

Explanation:

Strike price =$1.220

Three month forward price = 1.1710

Six month rate = 0.5%

Three month forward rate = 0.5/2

= 0.25%

Intrinsic price of put= Present value ( Strike price- three month forward price)

Intrinsic value of put = e^(-0.0025) (1.220-1.1710)

Intrinsic value of put option = $0.0489

That is minimum price of put option.

The option "$0.0489" is right option.

Nabeel answered 1 year ago

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