Question
In: Finance
Exercise 1. An investor has a short position in a European put on a share for...
Exercise 1.
An investor has a short position in a European put on a share for $4. The stock price is $40 and the strike price is $41.
(a). Suppose now the investor enters also into a long position of put option with strike price $39. This put is on the same underlying and has the same maturity time. Describe the total payoff to the trader, via a payoff table or payoff diagram.
Solutions
Expert Solution
| Put option | |||
| Put option provide right but not obligation to sale. | |||
| Put writer/ seller | Put writer must have to perform or purchase share/ stock on underlying price. | ||
| Put holder/purchaser | Have right but not obligation to perform. | ||
| Investor position | |||
| Position | Market price < Strike price | Market price =Strike price | Market price >Strike price |
| Put holder/purchaser | |||
| Profit | Strike price-market price- premium paid | ||
| Loss | Premium paid | Premium paid | |
| Put writer/ seller | |||
| Profit | Premium received | Premium received | |
| Loss | Strike price-market price- premium received | ||
| Payoff table for put holder with strike price =41 | |||
| Putholder exercise his option only when market price lower than strike price otherwise he has no obligation to perform. | |||
| Market Price | 1 | 41 | 100 |
| Position | Market price < Strike price | Market price =Strike price | Market price >Strike price |
| Profit calculation | 41-1-4 | Option will not be exercised. | |
| Profit | 36 | ||
| Loss calculation | 41-41-4 | ||
| Loss | -4 | -4 | |
| Payoff table for put holder with strike price =39 | |||
| For put writer it is must to perform when prices goes down else option will not be exercised by buyer and writer will receive the premium amount. | |||
| Market Price | 1 | 39 | 100 |
| Position | Market price < Strike price | Market price =Strike price | Market price >Strike price |
| Profit calculation | 39-39-4 | Option will not be exercised by buyer. | |
| Profit | 4 | 4 | |
| Loss calculation | (39-1-4) | ||
| Loss | -34 | ||
jeff jeffy answered 1 year agoRelated Solutions
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