I have some euros in my bank account (Currently: euro = $1.50). I also bought a...

I have some euros in my bank account (Currently: euro = $1.50). I also bought a put option on euro (X=$1.50, Premium=$0.02). a. Draw the combined graph. b. What is the name of this strategy? What is the objective with this strategy? c. How many break even points are there? What is (are) the break even point(s)? d. If ST=$1.35/euro just before expiration, what is my profit? e. If ST=$1.60/euro just before expiration, what is my profit?

Solutions

Expert Solution

pay off from Put Option = MAX (strike price - stock price, 0) - premium per share =MAX (1.50 - stock price, 0) - 0.02

Pay off from Asset holding = Stock price -1.50

Pay off from strategy = [Stock price -1.50]+MAX (1.50 - stock price, 0) - 0.02

Answer a)

Answer b) Purchasing an asset and simultaneously purchases put options create Married Put Strategy of investment .

Answer b.1) The strategy use to protect downside risk of holding asset. The strategy work as an insurance policy in case of fall of price.

Answer C) One break even point ,

at Break even Total Pay off = 0

0= [Stock price -1.50]+MAX (1.50 - stock price, 0) - 0.02

=> Stock Price = 1.52

Answer D) Pay off at 1.35,

Total Pay off = (1.35-1.50) +MAX(1.5-1.35,0)-0.02 =$ -0.02

Answer e) Pay off at 1.60

Total Pay off = (1.60-1.50) +MAX(1.5-1.60,0)-0.02 =$ 0.08

jeff jeffy answered 3 months ago

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