Reference no: EM131668778
Question: Consider again Problem. 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 75 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 $15 and $35 per share in increments of $1.00.
b. Discuss the value of the portfolio with and without the European put options.
Problem: 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 2 $22.50 5 $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 2 $1.00 5 $2.50 per share.
a. Build a model to calculate the profit of this European put option.
b. Construct a data table that shows the profit per share for a share price in six months between $10 and $30 per share in increments of $1.00.
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