Question

— The stock’s price S is $100. After three months, it either goes up and gets multiplied by the factor U = 1.13847256, or it goes down and gets multiplied by the factor D = 0.88664332. — Options mature after T = 0.5 year and have a strike price of K = $105. — The continuously compounded risk-free interest rate r is 5 percent per year. — Today’s European call price is c and the put price is p. Call prices after one period are denoted by cU in the up node and cD in the down node. Call prices after two periods are denoted by cUD in the “up, and then down node” and so on. Put prices are similarly defined. Which set of arbitrage-free put prices (in dollars) is correct?

Group of answer choices

p = 2.00, pU = 0, and pD = 4.06

p = 15.03, pU = 4.06, and pD = 26.39

p = 8.41, pU = 0, and pD = 26.39

p = 8.41, pU = 2.00, and pD = 15.03

please provide explanation

Answer 1

Solution.>

The correct option is (d) ie. p = 8.41, pU = 2.00, and pD = 15.03

I have solved this question in Excel. The formula used are shown in another excel file. If you still have any doubt, kindly ask in the comment section.

The formula used are:

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