Explanation

For a put option:

• In the money (ITM): When the strike price is greater than the current stock price
• At the money (ATM): When the strike price is equal to the current stock price
• Out of the money (OTM): When the strike price is less than the current stock price

Given:

• Current stock price = $100
• Strike price = $105
• Risk-free rate = 5% (irrelevant for moneyness determination)
• Time to expiration = 1 year (irrelevant for moneyness determination)

Analysis:

• Strike price ($105) > Current stock price ($100)
• For a put option, this means the option has intrinsic value because you could exercise it to sell the stock at $105 when it's only worth $100 in the market.
• The intrinsic value = Strike price - Stock price = $105 - $100 = $5

Since the strike price is higher than the current stock price, the put option is in the money.

Why the risk-free rate is irrelevant: The moneyness of an option is determined solely by the relationship between the current stock price and the strike price. The risk-free rate affects the option's time value and overall premium, but not whether it's in, at, or out of the money.

Correct answer: B (in the money)