Binomial Pricing: You Own a Share of Common Stock in ABC

question 37

Multiple Choice

Binomial pricing: You own a share of common stock in ABC, Inc., which is currently trading for $18 and will either rise to $30 or fall to $12 in one year. The risk-free rate for one year is 0 percent. You also own an American put option on the stock with a strike price of $20, which expires in one year. What is the value of the put option, and what would be the net payoff from exercising the option now?

• A) Option Value: $3.33 - Net Payoff $2
• B) Option Value: $3.33 - Net Payoff $6
• C) Option Value: $5.33 - Net Payoff $2
• D) Option Value: $5.33 - Net Payoff $6

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