Exam FAM Practice Question 1
Study guide: Exam FAM
An investor writes (sells) one 1-year European put option on a non-dividend-paying stock. You are given:
i) The strike price is 50.
ii) The put premium is 4.20.
iii) The continuously compounded risk-free interest rate is 5%.
iv) The stock price at expiry is 43.
Determine the cash flows to the writer of the put at time 0 and at expiry.
- A) Pays 4.20 at time 0; receives 7.00 at expiry
- B) Receives 4.20 at time 0; pays 7.00 at expiry
- C) Receives 4.20 at time 0; pays nothing at expiry
- D) Receives 4.20 at time 0; pays 2.58 at expiry
- E) Nothing at time 0; pays 2.80 at expiry
Answer this question and see the worked solution