- CFA Exams
- CFA Level I Exam
- Topic 7. Derivatives
- Learning Module 34. Valuation of Contingent Claims
- Subject 1. One-Period Binomial Model

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**CFA Practice Question**

Assume a stock price is $50 and in the next year it will either rise by 20% or fall by 10%. The risk-free interest rate is 6%. A put option on this stock has an exercise price of $50. If we use a one-period binomial model, what is the price of this put option?

A. $4.4

B. $2.52

C. $2.2

**Explanation:**μ = 1.2 and d = 0.9

π = (1.06 - 0.9) / (1.2 - 0.9) = 0.5333

S

^{+}= 50 x 1.2 = 60

S

^{-}= 50 x 0.9 = 45

p

^{+}= Max (0, 50 - 60) = 0

p

^{-}= Max (0, 50 - 45) = 5

p = (0.5333 x 0 + 0.4667 x 5) / 1.06 = 2.2

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