Question

1. Bob buys an Oct 50 Put option on MCD. He pays a premium of 1) Describe the value, y (profit and loss), at October in terms of x where x represents stock price as maturity.) profit and loss), at October expiration versus the price x, of MCD. (i.e. Specify y 2) The below table summarizes the relation between PRL and snot price at maturity for Bob's option position. Fill the values of P&L in the blank cells in the second row. X (spot price at maturity) 40 45 50 55 60 65 y (profit and loss) 3) Draw a P&L graph using the above table.

Answer 1

1]

Payoff of a long put option (Y) = Max[K-X, 0] - P

X = underlying price at expiry,

K = strike price

P = premium paid or received (long options involve paying premium, and short options receive premium)

2]

fMAX(50-A4,0) -5 В4 В C E Spot price at Long Put 1 maturity P/L $40 $5 2 $45 $0 ($5) ($5) ($5) ($5) $50 4 $55 5 $60 6 $65 7 LD C

А В Spot price at maturity Long Put P/L =MAX(50-A2,0)-5 1 2 40 -МAX(50-А3,0)-5 3 45 =MAX(50-A4,0)-5 4 50 =MAX(50-A5,0)-5 5 55 MAX(50-A6,0)-5 6 60 MAX(50-A7,0)-5 7 65 8

3]

Long Put P/L $6 $4 $2 $0 Long Put P/L $45 $40 $50 $55 $60 $65 ($2) ($4) ($6)