A put option in finance allows you to sell a share of stock at a given price in the future. There are different types of put options. A European put option allows you to sell a share of stock at a given price, called the exercise price, at a particular point in time after the purchase of the option. For example, suppose you purchase a six-month European put option for a share of stock with an exercise price of $26. If six months later, the stock price per share is $26 or more, the option has no value. If in six months the stock price is lower than $26 per share, then you can purchase the stock and immediately sell it at the higher exercise price of $26. If the price per share in six months is $22.50, you can purchase a share of the stock for $22.50 and then use the put option to immediately sell the share for $26. Your profit would be the difference, $26- $22.50-$3.50 per share, less the cost of the option. If you paid $1.00 per pu option, then your profit would be $3.50-$1.00-$2.50 per share. The point of purchasing a European option is to limit the risk of a decrease in the per-share price of the stock. Suppose you purchased 200 shares of the stock at $28 per share and 70 six-month European put options with an exercise price of $26. Each put option costs $1. (a) Using data tables, construct a model that shows the value of the portfolio with options and without options for a share price in six months between $20 and $29 per share in increments of $1.00. What is the benefit of the put options on the portfolio value for the different share prices? For subtractive or negative numbers use a minus sign even if there is a sign before the blank (Example: -300). If you answer is zero, enter "0" Share Price Benefit of Options $20 S 350 280 $21 $22 $23 $24 $25 $26 $27 $28 S $29 $ 210 $ 140 $ S 70 $ -70 $ -140 $ -210 M S -280 x (b) Discuss the value of the portfolio with and without the European put options. The lower the stock price, the more options to the overall portfolio for stock prices of $ V 24 beneficial the put options. The options are worth nothing at a stock price of s or lower S 25 or higher There is a benefit from the put

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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Questions Problem 10-15 Algo (Some Useful Excel Functions for Modeling)
2.
3.
5.
A put option in finance allows you to sell a share of stock at a given price in the future. There are different types of put options. A European put option allows you to sell a share of stock at a given price, called the exercise price, at a
particular point in time after the purchase of the option. For example, suppose you purchase a six-month European put option for a share of stock with an exercise price of $26. If six months later, the stock price per share is $26 or
more, the option has no value. If in six months the stock price is lower than $26 per share, then you can purchase the stock and immediately sell it at the higher exercise price of $26. If the price per share in six months is $22.50, you
can purchase a share of the stock for $22.50 and then use the put option to immediately sell the share for $26. Your profit would be the difference, $26 - $22.50 = $3.50 per share, less the cost of the option. If you paid $1.00 per put
option, then your profit would be $3.50 - $1.00 = $2.50 per share. The point of purchasing a European option is to limit the risk of a decrease in the per-share price of the stock. Suppose you purchased 200 shares of the stock at $28
per share and 70 six-month European put options with an exercise price of $26. Each put option costs $1.
(a) Using data tables, construct a model that shows the value of the portfolio with options and without options for a share price in six months between $20 and $29 per share in increments of $1.00. What is the benefit of the put
options on the portfolio value for the different share prices? For subtractive or negative numbers use a minus sign even if there is a + sign before the blank (Example: -300). If you answer is zero, enter "0".
Share Price Benefit of Options
$20
$21
$22
$23
$24
$25
$26
$27
$28
$29
69
Hide Feedback
19
69
350
Partially Correct
280
210
140
70
0
-70
-140
-210
(b) Discuss the value of the portfolio with and without the European put options.
The lower the stock price, the more
options to the overall portfolio for stock prices of $
-280
24
beneficial the put options. The options are worth nothing at a stock price of $
or lower
Hint(s) Check My Work
25
or higher
There is a benefit from the put
A-Z
O
Transcribed Image Text:Questions Problem 10-15 Algo (Some Useful Excel Functions for Modeling) 2. 3. 5. A put option in finance allows you to sell a share of stock at a given price in the future. There are different types of put options. A European put option allows you to sell a share of stock at a given price, called the exercise price, at a particular point in time after the purchase of the option. For example, suppose you purchase a six-month European put option for a share of stock with an exercise price of $26. If six months later, the stock price per share is $26 or more, the option has no value. If in six months the stock price is lower than $26 per share, then you can purchase the stock and immediately sell it at the higher exercise price of $26. If the price per share in six months is $22.50, you can purchase a share of the stock for $22.50 and then use the put option to immediately sell the share for $26. Your profit would be the difference, $26 - $22.50 = $3.50 per share, less the cost of the option. If you paid $1.00 per put option, then your profit would be $3.50 - $1.00 = $2.50 per share. The point of purchasing a European option is to limit the risk of a decrease in the per-share price of the stock. Suppose you purchased 200 shares of the stock at $28 per share and 70 six-month European put options with an exercise price of $26. Each put option costs $1. (a) Using data tables, construct a model that shows the value of the portfolio with options and without options for a share price in six months between $20 and $29 per share in increments of $1.00. What is the benefit of the put options on the portfolio value for the different share prices? For subtractive or negative numbers use a minus sign even if there is a + sign before the blank (Example: -300). If you answer is zero, enter "0". Share Price Benefit of Options $20 $21 $22 $23 $24 $25 $26 $27 $28 $29 69 Hide Feedback 19 69 350 Partially Correct 280 210 140 70 0 -70 -140 -210 (b) Discuss the value of the portfolio with and without the European put options. The lower the stock price, the more options to the overall portfolio for stock prices of $ -280 24 beneficial the put options. The options are worth nothing at a stock price of $ or lower Hint(s) Check My Work 25 or higher There is a benefit from the put A-Z O
Expert Solution
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An option is a contract that allows the buyer to acquire or sell the underlying on a future date at a price specified today. The call and put are the two option varieties. The call option gives its buyer the right to purchase the underlying at the price specified today in the upcoming period. The call option is generally bought when the investor expects the prices to rise. The put option offers the right to sell the underlying at currently specified price, it is bought if the investor is bearish about the market.

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