Please solve - capital market analysis question

A share price is curently quoting ar Rs. 50. It is known at the end of six months it will be either 45 or 55. The risk free rate is 10% p.a. with continous compunding. what is value of six month European Put option with a strike price of Rs. 50.

 

Not able to solve (Answer given in scanner only).

Answer- Value of Put :- Rs. 1.16.

 

 

Replies (2)

Firstly calculate risk neutral probability of making up move and down move. It is calculated as under:

(exp(r)-d)/(u-d) here r is risk free rate applicable for period under consideration, d is down price/initial price and u is up price/initial price. You need to use exponential function on any scientific calculator. Else it will be given in question paper. 

 

in this case risk neutral up probability is 75.64%. so the same for down probability is 24.36%.

 

Here if price moves up value of put is zero but if it moves down it is Rs. 5. probability of down move is 24.36% so expected value is 1.218. we further discount this using risk free rate to arrive at the value of Rs. 1.16

u=55/50= 1.1,  

d=45/50=0.90, 

r for 6 months = 6/12 =  0.05

C1=0

C2=50-45=5

value of put = [u-1-r /u-d] [C2/1+r]      

                   = [1.1 - 1 - 0.05/1.1 - 0.9] [5/1+0.05]

                   = [0.05/0.20] [4.76]

                   =1.19  [Minor difference of .03 to be ignored]

Leave a Reply

Your are not logged in . Please login to post replies

Click here to Login / Register  

Company
Featured 11 September 2026
Audit Executive

RBSM Corporate Advisors Private Limited

Pune

CA

View Details
Company
ARTICLESHIP 21 September 2026
CA Article Assistant

KK & Company Chartered Accountant

Pune

CA Inter

View Details
Company
19 September 2026
CA/Semi-CA/BCom

Pravin Sarvaiya

Mumbai

CA Inter

View Details
Company
08 September 2026
Semi-Qualified Assitant

Subrahmanyam & Sivudu CA Firm

Hyderabad

CA Inter

View Details
Company
ARTICLESHIP 16 September 2026
Article Assistant

MANUJ SHARMA AND COMPANY

Noida

CA Inter

View Details
Company
19 September 2026
Finance Manager

Mugdha Art Studio

Hyderabad

CA

View Details
Company
08 September 2026
Audit Executive

Thammana & Associates

Srikakulam

B.Com

View Details
Company
16 September 2026
Internal Audit - Team Lead

Consulting & Beyond

Chennai

CA

View Details