You have written a put option on Diebold Inc. common stock. The option has an exercise price
Question:
a. What is your net profit if Diebold’s stock price increases to $ 32 and stays there until the option expires?
b. What is your net profit on the option if Diebold’s stock price decreases to $ 25 at expiration of the option and the option holder exercises the option?
Step by Step Answer:
a If the price of the underlying stock is 32 greater than the exercise price and stays th...View the full answer
Financial Markets and Institutions
ISBN: 978-0077861667
6th edition
Authors: Anthony Saunders, Marcia Cornett
Related Video
A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price. For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses. It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.
Students also viewed these Banking questions
-
A put option on Iowa stock specifies an exercise price of $71. Today the stock's price is $68. The premium on the put option is $8. Assume the option will not be exercised until maturity, if at all....
-
A put option on Indiana stock specifies an exercise price of $23. Today the stock's price is $24. The premium on the put option is $3. Assume the option will not be exercised until maturity, if at...
-
You buy a stock option with an exercise price of $50. The cost of the option is $4. If the stock ends up at $56, indicate whether you have a profit or loss with a call option? With a put option?
-
Medallion and RIEF (Renaissance Institutional Equity Fund) are both managed by Renaissance Technologies. How do they differ in terms of asset classes, dollar capacity, average holding period of each...
-
Whats your favorite ice cream flavor? For people who buy ice cream, the all-time favorite is still vanilla. About 25% of ice cream sales are vanilla. Chocolate accounts for only 9% of ice cream...
-
A girl is riding a bicycle at a constant velocity of 3.0 m s 1 along a straight road. At time t = 0, she passes her brother sitting on a stationary bicycle. At time t = 0, the boy sets off to catch...
-
A liquid of constant density \(ho\) and constant viscosity \(\mu\) flows down a wide, long inclined flat plate. The plate makes an angle \(\theta\) with the horizontal. The velocity components do not...
-
The condenser of a steam power plant consists of AISI 302 stainless steel tubes (k s = 15 W/m K) each of outer and inner diameters Do = 30 mm and Di = 26 mm, respectively. Saturated steam at 0.135...
-
A tin of cat food weighing 28 g is placed at the top of a dry chopping board made of wood and the board is slowly raised in angle until the tin slides downwards. Measured by the mid-point of a...
-
The balance sheet items for Collier Butcher Shop (arranged in alphabetical order) were as follows at July 1, 2015. (You are to compute the missing figure for Retained Earnings.) During the next few...
-
You have written a call option on Walmart common stock. The option has an exercise price of $ 74, and Walmarts stock currently trades at $ 72. The option premium is $ 1.25 per contract. a. How much...
-
Refer to Table. a. How many ExxonMobil October 2013 $ 92.50 put options were outstanding at the open of trading on August 7, 2013? b. What was the closing price of a 10-year Treasury bond December...
-
Explain both the contributions and limitations of the Kyoto Protocol.
-
Using real-word examples, discuss the Phillips curve in terms of the trade-off between inflation and unemployment.
-
Using real-word examples, discuss the extent to which demand-side policies are effective in reducing inflation.
-
One of the arguments for punitive damages (damages paid to the plaintiff in excess of actual damages) is that such damage payments compensate for the fact that lawsuits are not always filed, even if...
-
Does the problem of monopoly provision of a bad arise with a true Pigovian fee? Why?
-
Some policy makers argue that it would be desirable to reward generators of hazardous wastes for appropriately disposing of their wastes. Describe a possible reward scheme. Why is it a good idea?...
-
A farsighted person named Amy cannot see clearly objects closer to the eye than 75 cm. Determine the power of the spectacle lenses which will enable her to read type at a distance of 25 cm.
-
What does non-recourse financing mean?
-
The recent price per share of Dragon Vacations Inc. is \($50\) per share. Calls with exactly six months left to expiration are available on Dragon with strikes of \($45,\) \($50,\) and \($55.\) The...
-
Assume that breaking news causes bond portfolio managers to suddenly expect much higher economic growth. How might bond prices be affected by this expectation? Explain. Now assume that breaking news...
-
Assume that the bond market participants suddenly expect the Fed to substantially increase the money supply. a. Assuming no threat of inflation, how would bond prices be affected by this expectation?...
-
Assume that the bond market participants suddenly expect the Fed to substantially increase the money supply. a. Assuming no threat of inflation, how would bond prices be affected by this expectation?...
-
Write a script called ChangeExtensions that accepts two file name extensions as arguments, and renames all files with the first extension to have the second extension. For example, Change Extensions...
-
Write an HTML document that draws the trapezoid (a rectangle that is wider on one side) below in Canvas. (30,30) 50 50 70
-
Find V 1 V 5 V source I 2 I 3 I 4 I 5 R 1 R 2 R 3 R 4 R total. V 2 = 6 0 . 0 V , V 3 = 9 0 . 0 V , V 4 = 5 0 . 0 V , I 1 = 1 . 5 A , I total = 4 . 0 A , R 5 = 3 0 ohms. Indicate where appropriate....
Study smarter with the SolutionInn App