Question

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 60 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 $ ( I need to know the value for each of these through a VLOOKUP table)

Answer 1

Number of shares = 200, Purchase price = $28 per share

without Option Value of portfolio

SHARE PRICE(in $)	difference from purchase price for one share(in $)	Profit /loss for 200 unit of shares(in $)
20	- 8	-1600
21	-7	-1400
22	-6	-1200
23	-5	-1000
24	-4	-800
25	-3	-600
26	-2	-400
27	-1	-200
28	0	0
29	1	200

Number of option = 60, Exercise Price = $ 26, Put option price = $1 per put option

WITH OPTION VALUE OF PORTFOLIO

Share price(in $)	Change in total value of share (in $)	Profit or loss on excising one unit of Put option (in $)	Profit or loss on 60 unit of put option (in $)	Total profit of portfolio (in $)	Impact of put option on portfolio (in $)
20	- 1600	5	300	-1300	300
21	-1400	4	240	-1160	240
22	-1200	3	180	-1020	180
23	-1000	2	120	-880	120
24	-800	1	60	-740	60
25	-600	0	0	-600	0
26	-400	-1	-60	-460	-60
27	-200	-1	-60	-260	-60
28	0	-1	-60	-60	-60
29	200	-1	-60	140	-60