Question

Assignment 1 (1 pt). A European put on Microsoft shares with an exercise price of $50 and maturity of 3 months is trading at $10. The 3-month interest rate, not annualized, is 0.4%. What is the price of Microsoft stock that makes the put break-even?

          Assignment 1 (1 pt).
A European put on Microsoft shares with an exercise price of $50 and maturity of 3 months is trading at $10. The 3-month interest rate, not annualized, is 0.4%. What is the price of Microsoft stock that makes the put break-even?

Assignment 1 (1 pt).
A European put on Microsoft shares with an exercise price of 50 and maturity of 3 months is trading at10. The 3-month interest rate, not annualized, is 0.4%. What is the price of Microsoft stock that makes the put break-even?

Added by William C.

Horngren’s Cost Accounting

Srikant M. Datar, Madhav V. Rajan 16th Edition

Instant Answer

Solved by Expert Ayushi Sambyal

Step 1

Since the interest rate is not annualized, we need to adjust it for the 3-month period. The present value of the exercise price is given by: PV = Exercise Price / (1 + Interest Rate)^Time PV = $50 / (1 + 0.004)^3 PV = $50 / 1.012 PV ≈ $49.41 Show more…

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A European put on Microsoft shares with an exercise price of $50 and maturity of 3 months is trading at $10. The 3-month interest rate, not annualized, is 0.4%. What is the price of Microsoft stock that makes the put break-even?