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 of the stock at $28 per share and 65 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 $29 $ 475 $ 380 $ 285 $ S 49 40 $ 190 95 0 -95 -95 -95 -95 xx
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 of the stock at $28 per share and 65 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 $29 $ 475 $ 380 $ 285 $ S 49 40 $ 190 95 0 -95 -95 -95 -95 xx
Chapter5: Currency Derivatives
Section: Chapter Questions
Problem 5ST
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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 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 of the stock at $28 per
share and 65 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
475
$21
380
$22
285
$23
190
$24
95
$25
$26
-95
$27
-95
$28
-95
$29
-95
%24
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