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 six-month European put option for a share of stock with an exercise price of $26. If six months later, the stock price per share is $26 or 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, $26 - $22.50 = $3.50 per share, less the cost of the option. If you paid $1.00 per put option, then your profit would be $3.50 - $1.00 = $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 the stock at $28 per share and 85 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 on the portfolio 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 zero, enter "0". Share Price Benefit of Options $20 $21 $22 $23 $24 $25 $26 $27 $28 $ 350 $ $ $ $ $ $ 280 210 140 70 0 -70 -70 -70 X X
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 six-month European put option for a share of stock with an exercise price of $26. If six months later, the stock price per share is $26 or 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, $26 - $22.50 = $3.50 per share, less the cost of the option. If you paid $1.00 per put option, then your profit would be $3.50 - $1.00 = $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 the stock at $28 per share and 85 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 on the portfolio 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 zero, enter "0". Share Price Benefit of Options $20 $21 $22 $23 $24 $25 $26 $27 $28 $ 350 $ $ $ $ $ $ 280 210 140 70 0 -70 -70 -70 X X
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
Related questions
Question
Transcribed Image Text:### Understanding Put Options in Finance
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, known as the exercise price, at a specific point in time after purchasing the option.
#### Example Scenario:
- Suppose you buy a six-month European put option for a stock with an exercise price of $26.
- If after six months the stock price per share is $26 or more, the option has no value.
- If the stock price is lower than $26, you can purchase the stock and sell it at $26 using the put option.
#### Profit Calculation:
- If the price per share in six months is $22.50, you buy the stock at $22.50 and sell it immediately for $26 using the option.
- Profit: $26 - $22.50 = $3.50 per share, minus the cost of the option.
- If you paid $1.00 per option, profit = $3.50 - $1.00 = $2.50 per share.
#### Risk Management:
- Purchasing a European put option limits the risk of a decrease in the stock’s per-share price.
- Example: You purchased 200 shares at $28 each and 85 six-month put options with an exercise price of $26, each costing $1.
#### Data Table Analysis:
(a) Construct a model using data tables to show the portfolio value with and without options for six-month six-month future share prices between $20 and $29 in $1 increments.
- **Share Price vs. Benefit of Options:**
- $20: $350
- $21: $280
- $22: $210
- $23: $140
- $24: $70
- $25: $0
- $26: -$70
- $27: -$70
- $28: -$70
Negative numbers indicate a loss, and zero indicates no gain or loss. The analysis helps in strategizing the implementation of put options to mitigate risks effectively.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 4 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education