Calculate the Price of a Two-Month European Put Option Given

question 22

Multiple Choice

Calculate the price of a two-month European put option given the following information: the exercise price is $19,the current share price is $15 and the risk-free interest rate is 12% p.a.Furthermore,the share price may go up by 10 per cent or down by 10 per cent at the end of each month.Assume a risk-neutral world and time periods of one month each.

• A)$4.26
• B)$3.66
• C)$4.21
• D)$3.63

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Definitions:

Balance-of-Economic Transactions

A record of all economic transactions between residents of a country and the rest of the world during a particular period, including trade, investments, and financial transfers.

Bretton Woods Agreement

The Bretton Woods Agreement was established in 1944 to set up a new international monetary system, creating exchange rate stability and promoting international economic cooperation.

Exchange Rates

The value of one currency expressed in terms of another currency, which determines how much foreign currency can be exchanged for a unit of domestic currency.

Gold Convertibility

The ability to convert a currency directly into gold, a system which provides a measure of security and confidence in a currency's value.