A European put option on stock conveys the right to sell the stock at a pre-specified price, called the exercise price, at the date of the option. The value of this put at is (exercise price – stock price) or $0, whichever is greater. Suppose the exercise price is $100 and the underlying stock trades in ticks of $0.01. At any time before the terminal value of the put is a random variable.
A. Describe the distinct possible outcomes for terminal put value. (Think of the put’s maximum and minimum values and its minimum price increments.)
B. Is terminal put value, at a time before a discrete or continuous random variable?
C. Letting Y stand for terminal put value, express in standard notation the probability that terminal put value is less than or equal to $24. No calculations or formulas are necessary.
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