Put option: It is an agreement that gives the buyer the right entitled to sell a stock at a pre-specified price (known as exercise price or strike price) within a pre-specified period. The stock on which the put option is provided is called the asset underlying. Pay off from a put option: The payoff from a put option contract for its holder is regarded as the strike price less the current price of the underlying asset. So, higher the strike price compared to the current price of the underlying asset, higher is the value of the put option. In other words, the worth of put options increases with the difference between the price of underlying asset and the strike price where the stock price of underlying asset is less than the strike price. And the worth of a put option dictates the purchase price of a put option. More worthy the put option, higher will be its purchase price. When the strike price is less than the stock price, the exercise of put option will cause negative cash flow. So, in that case, put option is not exercised and causes zero payoff. Profit from a put option: The profit from a put contract for its holder is the payoff from a put option less its purchase price, paid earlier. To compute: The maximum possible profit from the given put option for its holder

Question

Want to see the full answer?

Answer 1

Question

Chapter 15, Problem 5PS

Summary Introduction

Put option:

It is an agreement that gives the buyer the right entitled to sell a stock at a pre-specified price (known as exercise price or strike price) within a pre-specified period. The stock on which the put option is provided is called the asset underlying.

Pay off from a put option:

The payoff from a put option contract for its holder is regarded as the strike price less the current price of the underlying asset. So, higher the strike price compared to the current price of the underlying asset, higher is the value of the put option. In other words, the worth of put options increases with the difference between the price of underlying asset and the strike price where the stock price of underlying asset is less than the strike price. And the worth of a put option dictates the purchase price of a put option. More worthy the put option, higher will be its purchase price.

When the strike price is less than the stock price, the exercise of put option will cause negative cash flow. So, in that case, put option is not exercised and causes zero payoff.

Profit from a put option:

The profit from a put contract for its holder is the payoff from a put option less its purchase price, paid earlier.

To compute:

The maximum possible profit from the given put option for its holder

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

An annuity provides payments at the end of each two-year period for twenty years. It pays $1,000 at the end of the first period and increases the payment by $1,000 in each subsequent period, so that at the end of the tenth period it pays $10,000. Given a 2% nominal annual interest rate compounded semiannually, determine in which of the following ranges is the present value of this annuity. please use tvm if neededI

A. What is the amount of the annuity purchase required if you wish to receive a fixed payment of $200,000 for 20 years? Assume that the annuity will earn 10 percent per year.B. Calculate the annual cash flows (annuity payments) from a fixed-payment annuity if the present value of the 20-year annuity is $1 million and the annuity earns a guaranteed annual return of 10 percent. The payments are to begin at the end of the current year.C. Calculate the annual cash flows (annuity payments) from a fixed-payment annuity if the present value of the 20-year annuity is $1 million and the annuity earns a guaranteed annual return of 10 percent. The payments are to begin at the end of five years. I need help solving question C on a financial calculator.

John wants to buy a property for $105,000 and wants an 80 percent loan for $84,000. A lenderindicates that a fully amortizing loan can be obtained for 30 years (360 months) at 6 percentinterest; however, a loan fee of $3,500 will also be necessary for John to obtain the loan.a. How much will the lender actually disburse?b. What is the APR for the borrower, assuming that the mortgage is paid off after 30 years (fullterm)?c. If John pays off the loan after five years, what is the effective interest rate? Why is it differ-ent from the effective interest rate in (b)?d. Assume the lender also imposes a prepayment penalty of 2 percent of the outstanding loanbalance if the loan is repaid within eight years of closing. If John repays the loan after fiveyears with the prepayment penalty, what is the effective interest rate?