Suppose you believe that the price of a particular underlying stock, currently selling at Rs 140, will decrease considerably in the next six months.…
BBA Financial Derivatives · 2024 · Solved Question with Answer
Suppose you believe that the price of a particular underlying stock, currently selling at Rs 140, will decrease considerably in the next six months. You decide to purchase a put option expiring in six months on this underlying stock. The put option has an exercise price of Rs 130 and sells for Rs 12.
a. Determine the gain or loss for you if the possible ending prices of the underlying stock six months are Rs 150, Rs 130, Rs 120 and Rs 110.
b. Determine the breakeven price of the underlying at expiration. Check that your answer is consistent with the solution to Part a of this problem.
c. What is the maximum profit and loss that you can have?