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The current price of a non-dividend-paying stock is $40. Over the next year it is expected...

The current price of a non-dividend-paying stock is $40. Over the next year it is expected to rise to $42 or fall to $37. An investor buys put options with a strike price of $41 expiring in one year. Please form a riskless portfolio and use no arbitrage method to value this put option. Risk free rate is 3% per annum, continuously compounded.

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Answer #1

To solve this question we use the diagram and then calculate the risk free neutral rate and then calculate the value of put option

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