CFA Practice Question

There are 206 practice questions for this study session.

CFA Practice Question

Continue with question 1. Assume a stock price is $55 and that in the next year it will either rise by 20% or fall by 16%. The risk-free interest rate is 5%. A put option on this stock has an exercise price of $60. Determine its price.
Correct Answer: $5.48

μ = 1.2 and d = 0.84
π = (1.05 - 0.84) / (1.2 - 0.84) = 0.5833
S+ = 55 x 1.2 = $66
S- = 55 x 0.84 = 46.2
p+ = Max (0, $60 - $66) = $0
p- = Max (0, $60 - $46.2) = $13.8
p = (0.5833 x 0 + 0.4167 x 13.8) / 1.05 = $5.48

User Contributed Comments 3

User Comment
yly14 calculation for pi is the same for put or call. "d" accounts for the decrease in stock price, not the amount in-the-money of call or put.
AusPhD 3.33 + 60/1.05 - 55 = Put price
jd2442424 Can also use:
n = (p_ - p+) / (S+ - S_)
PV(TV) = (n * s+ - p+ * 0) / (1 + r)^t
p0 = PV(TV) - so * n
This would be easier if the 62.3 used n correctly.
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