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Use DerivaGem to calculate the value of an American put option on a nondividend paying stock when

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Use DerivaGem to calculate the value of an American put option on a nondividend paying stock when the stock price is $30, the strike price is $32, the risk-free rate is 5%, the volatility is 30%, and the time to maturity is 1.5 years. (Choose binomial American for the “option type” and 50 time steps.)
a. What is the option’s intrinsic value?
b. What is the option’s time value?
c. What would a time value of zero indicate? What is the value of an option with zero time value?
d. Using a trial and error approach calculate how low the stock price would have to be for the time value of the option to be zero. Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity. Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
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a DerivaGem shows that the value of the option is 457 The options intrinsic ...View the full answer


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Fundamentals of Futures and Options Markets

Fundamentals of Futures and Options Markets

ISBN: 978-0132993340

8th edition

Authors: John C. Hull

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A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price. For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses. It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.

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