Question

8. Consider the following portfolio: 1x Stock, S = 45 CZK (long); 1x Put option, X = 46 CZK, P = 4 CZK (long). Depending on the price Stof expiration a) Determine when the option will be exercised; b) Calculate when the portfolio will be profitable; c) Draw a graph depending on the price St.

Question number 8.
Thank you

Answer 1

a) here in portfolio , one has put option with strike price of CZK 46 and premium paid is of CZK 4

Put option gives its holder right to sell underlying security at specified price at specified date in future

Put option is exercised when the price as at expiry is lower than the strike price, thus in our case if price at expiry is less than 46 CZK. put option will be exercised

b) Table showing Pay off

Price as at expiry	Profit/loss on stock purchased @ 45 CZK	Profit/loss on put option purchased (Strike price 46 CZK)	Premium paid	Net profit
35	-10	11	-4	-3
36	-9	10	-4	-3
37	-8	9	-4	-3
38	-7	8	-4	-3
39	-6	7	-4	-3
40	-5	6	-4	-3
41	-4	5	-4	-3
42	-3	4	-4	-3
43	-2	3	-4	-3
44	-1	2	-4	-3
45	0	1	-4	-3
46	1	0	-4	-3
47	2	0	-4	-2
48	3	0	-4	-1
49	4	0	-4	0
50	5	0	-4	1
51	6	0	-4	2
52	7	0	-4	3
53	8	0	-4	4
54	9	0	-4	5
55	10	0	-4	6

Thus portfolio will start making profit when price of share as at expiry will be more than 49 CZK

C) Profit diagram

Net profit Onw + UiO - Net profit -1 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55