Question

Problem-04a: You purchase (long position) 15 European put option contracts on BBB stock at the premium of $6.80. The exercise price of the option is $75, the maturity of the options is 2-month, and stock is currently trading at $75. i. What is the payoff of your position if the stock price at maturity is $70? Show your result numerically. ii. Repeat i. for the stock price at maturity of $83.

Problem-04b: For the problem-04a: i. What is the profit (P/L) of your position if the stock at maturity is $70 or $83? For each case show your results numerically. ii. What is the Break Even Point (BEP) of your investment? (It is easier to find the BEP on one option, rather than for the entire value of the investment!) [For the following Excel exercise, you should use one option to one underlying in calculating and graphing, rather than using entire value of the investment.]

Problem-04c (Excel Exercise): For the problems -04a and -04b, assume that BBB stock price at maturity will take values between $50 and $100 in increment of $5. i. Will you exercise your put option? Give only NO, INDIFFERENT, YES answer. This is a qualitative question? ii. At each likely underlying price at maturity, calculate and show the Payoff and P/L numbers using formulas (in Excel). Note that stock price of BBB ranges from $50 of $100 in increments of $5. iii. Graph your numbers found in ii. iv. Integrate numbers calculated in Problem-04a i, ii, and Problem-04b i, ii. (This means put these numbers into the graph).

Answer 1