A put option in finance allows you to sell a share of stock at a given price in the future. There are different types of put options. A European put option allows you to sell a share of stock at a given price, called the exercise price, at a particular point in time after the purchase of the option. For example, suppose you purchase a she-month European put option for a share of stock with an exercise price of $25. tf six months later, the stock price per share is $26 more, the option has no value. If in six months the stock price is lower than $26 per share, then you can purchase the stock and immediately sell it at the higher exercise price of $26. If the price per share in six months is $22.50, you can purchase a share of the stock for $22.50 and then use the put option to immediately sell the share for $26. Your profit would be the difference, $25-$22.50-$3.50 per share, less the cost of the option. If you paid $1.00 per put ption, then your profit would be $3.30-11.00-$2.50 per share. The point of purchasing a European option is to limit the risk of a decrease in the per-share price of the stock Suppose you purchased 200 shares of the stock at $29 per share and 95 six-month European put options with an exercise price of $26. Each put option costs $1. (a) Using data tables, construct a model that shows the value of the portfolio with options and without options for a share price in six months between $20 and $29 per share in increments of $1.00. What is the benefit of the put options the portfolie value for the different share prices? For subtractive or negative numbers use a minus sign even if there is a + sign before the blank (Example:-300). If you answer is, enter "" Share Price Benefit of Options $20 121 $22 123 * 124 525 x $26 x $27 $2 × * (b) Oncns the value of the portfolio with and without the European put options The lower the stack price, the more options to the overall portfolio for stock prices beneficial the put options. The options are worth nothing at a stock price of s or higher There is a benefit from the out lower
A put option in finance allows you to sell a share of stock at a given price in the future. There are different types of put options. A European put option allows you to sell a share of stock at a given price, called the exercise price, at a particular point in time after the purchase of the option. For example, suppose you purchase a she-month European put option for a share of stock with an exercise price of $25. tf six months later, the stock price per share is $26 more, the option has no value. If in six months the stock price is lower than $26 per share, then you can purchase the stock and immediately sell it at the higher exercise price of $26. If the price per share in six months is $22.50, you can purchase a share of the stock for $22.50 and then use the put option to immediately sell the share for $26. Your profit would be the difference, $25-$22.50-$3.50 per share, less the cost of the option. If you paid $1.00 per put ption, then your profit would be $3.30-11.00-$2.50 per share. The point of purchasing a European option is to limit the risk of a decrease in the per-share price of the stock Suppose you purchased 200 shares of the stock at $29 per share and 95 six-month European put options with an exercise price of $26. Each put option costs $1. (a) Using data tables, construct a model that shows the value of the portfolio with options and without options for a share price in six months between $20 and $29 per share in increments of $1.00. What is the benefit of the put options the portfolie value for the different share prices? For subtractive or negative numbers use a minus sign even if there is a + sign before the blank (Example:-300). If you answer is, enter "" Share Price Benefit of Options $20 121 $22 123 * 124 525 x $26 x $27 $2 × * (b) Oncns the value of the portfolio with and without the European put options The lower the stack price, the more options to the overall portfolio for stock prices beneficial the put options. The options are worth nothing at a stock price of s or higher There is a benefit from the out lower
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A put option in finance allows you to sell a share of stock at a given price in the future. There are different types of put options. A European put option allows you to sell a share of stock at a given price, called the exercise price, at a
particular point in time after the purchase of the option. For example, suppose you purchase a she-month European put option for a share of stock with an exercise price of $25. tf six months later, the stock price per share is $26
more, the option has no value. If in six months the stock price is lower than $26 per share, then you can purchase the stock and immediately sell it at the higher exercise price of $26. If the price per share in six months is $22.50, you
can purchase a share of the stock for $22.50 and then use the put option to immediately sell the share for $26. Your profit would be the difference, $25-$22.50-$3.50 per share, less the cost of the option. If you paid $1.00 per put
ption, then your profit would be $3.30-11.00-$2.50 per share. The point of purchasing a European option is to limit the risk of a decrease in the per-share price of the stock Suppose you purchased 200 shares of the stock at $29
per share and 95 six-month European put options with an exercise price of $26. Each put option costs $1.
(a) Using data tables, construct a model that shows the value of the portfolio with options and without options for a share price in six months between $20 and $29 per share in increments of $1.00. What is the benefit of the put options
the portfolie value for the different share prices? For subtractive or negative numbers use a minus sign even if there is a + sign before the blank (Example:-300). If you answer is, enter ""
Share Price Benefit of Options
$20
121
$22
123
*
124
525
x
$26
x
$27
$2
×
*
(b) Oncns the value of the portfolio with and without the European put options
The lower the stack price, the more
options to the overall portfolio for stock prices
beneficial the put options. The options are worth nothing at a stock price of s
or higher
There is a benefit from the out
lower
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