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The current price of Kilot Corporation is $30.00. Its stock price will either go up by...

The current price of Kilot Corporation is $30.00. Its stock price will either go up by 30% or down by 30% in one year. The stock has no dividends. The one year risk free rate is 4%. Using the binomial model, calculate the price of a one years put option on Kilot Stock with a strike price of $32. (show your calculations; use a binomial tree/timeline with two branches to summarize the information)

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Expert Solution

1 Year
Stock price = 39
(30+30%)
Value of put option = 32 - 39 0
Strike price = $    32.00
Current Market price = $30 Stock price 21
Risk-free rate = 4% (30-30%)
Value of Put option = 32 - 21 $    11.00
Put delta = (V.P. at Upper value -V.P. at Down value) / (Upper Value - Down value)
(0-11) / (39 - 12)
-0.61111
Value of put option = ( Present value of Upper value - Current market price ) * Put delta
(39/1.04   - 30 ) * 0.61111 (put delta shall be taken ignoring - sign)
$       4.58
So, Value of put option is $4.58.

jeff jeffy answered 1 year ago
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