Final answer:
The student is asking about computing the price of a European put option using given financial parameters. The correct pricing should use a model such as the Black-Scholes formula, taking into account factors like stock price, time to expiry, and volatility. Assuming the model and inputs are accurate, the expected price for the put option should be around $3.44.
Step-by-step explanation:
The question revolves around the valuation of options, more specifically, pricing a European put option using the given parameters. To calculate the correct price of a put option, one would typically use the Black-Scholes formula or a binomial pricing model, both of which are rooted in the fundamentals of financial mathematics and quantitative analysis. The input parameters such as initial stock price (S0), time to expiry (T), risk-free rate (rf), strike price (E), and volatility (sigma), are all essential for the pricing model.
For example, in the Black-Scholes model, the put option price is determined using these inputs in a complex equation that incorporates the cumulative normal distribution function to estimate the expected value of the option. The price of a put option is affected by changes in these parameters, and the accuracy of the result depends on the correctness of the inputs and the appropriateness of the model for the type of option being priced. In this scenario, if the student has utilized an appropriate pricing model and the inputs are correct, the expected price of the put option should indeed be approximately $3.44, as suggested.