asiagiles1361 asiagiles1361

18-08-2020
Business

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Discount factor is 0.985. Stock XYZ is selling for $40 a share. An American option on this stock with a strike price of $38 is trading at $0.25 per share. If it is known that this option is priced above its intrinsic value, what type of option is it?

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ogorwyne ogorwyne

19-08-2020

Answer:

Put option

Explanation:

We have current price 40dollars - strike price 38dollars = $2. The question says the stock is trading at $0.25 per share. Since 0.25 is higher than 0 it is a put option. And the intrinsic value is $2.

The put option gives one the right to sell a particular number of shares at a price that has been set which is referred to as the strike price before a certain date.

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