In: Finance
4. Mr. Madoff wrote (sold) a put option on Google stock with strike price $480 per share and received the premium of $2.25. Answer the following question and always think about who will decide whether to strike or not to strike.
1) Suppose Google stock price is $460 before option expiration date. What would be Mr. Madoff’s profit/loss?
2) Suppose Google stock price is $490 before option expiration date. What would be Mr. Madoff’s profit/loss?
3) At what stock price will Mr. Madoff breakeven?
4) Draw the relationship between Mr. Madoff’s profit/loss and Google stock price by changing stock price from $470 to $490.
1. as the Strike price is higher than market Price the put option will be exercised by holder.
Mr. Madoff’s loss = Strike Price - Market Price - Premium received
Mr. Madoff’s loss = $480 - $460 - 2.25
Mr. Madoff’s loss = $17.75
2. As the Strike price is Less than market Price the put option will be lapsed by holder.
Mr. Madoff’s Profit = Premium Received= $2.25
3. the Price of Break Even = Strike Price - Premium received = $480 - 2.25 = $477.75
4.
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