What is the value of a put option at maturity

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Reference no: EM133065195

LO 1 Understand the basics of call and put options and how to calculate their payoffs and profits.
LO 2 Understand the factors that affect option values and how to price call and put options using no arbitrage conditions.
LO 3 Understand the famous Black-Scholes option pricing model and its uses.
LO 4 Understand how the five factors in the Black-Scholes formula affect the value of an option.
LO 5 Understand how the Black-Scholes model can be used to value the debt and equity of a firm.
LO 6 Understand the exposures to risk in a company's business and how a company could choose to hedge these risks.
LO 7 Understand the similarities and differences between futures and forward contracts and how these contracts are used to hedge risk.
LO 8 Understand the payoffs of option contracts and how they are used to hedge risk.
LO 9 Understand the major term structure of interest rate theories.

Question 1 Defining intrinsic value
What is the intrinsic value of a call option? How do we interpret this value?

Question 2 Business Enterprises discuss managerial options, the option to expand, the option to abandon. employee options and strategic options. Which of these would you regard as a call option?

Question 3 Calculating payoffs
Use the following option quote to answer the questions below.

18 Dec 20xx
Weasel Ltd
Last sale price $16.00

Strike price Jun July Aug Jun July Aug

$16.00 36 cents 48 cents 72 cents 24 cents 27 cents 32 cents

a Suppose you buy 100 July $16.00 call contracts. How much will you pay, ignoring commissions?
b In part (a), suppose that Weasel is selling for $20 per share on the expiration date. What are your options worth?
c Suppose you buy 20 of the Aug 20>0< put contracts. What is your maximum gain? On the expiration date, Weasel is selling for $15.00 per share. What are your options worth?
In part (c), suppose you sold your 20 Aug put contracts. What is your net gain or loss if Weasel is selling for $13.00? For $18? What is the break-even price; that is, the share price that results in a profit of zero?

Question 4 What is the value of a put option at maturity? Based on your answer, what is the intrinsic value of a put option?

Question 5 Calls versus puts
Complete the following for each of these investors:
a A seller of put options (pays/receives) money for the (nght/obfigation) to (buy/set° a specified asset at a fixed price for a fixed length of time.
b A buyer of call options (pays/receives) money for the (right/obligation) to (buy/sell) a specified asset at a fixed price for a fixed length of time.
c A buyer of put options (pays/receives) money for the (right/obligation) to (buy/sell) a specified asset at a fixed price for a fixed length of time.
d A seller of call options (pays/receives) money for the (right/obligation) to (buy/sell) a specified asset at a fixed price for a fixed length of time.

Reference no: EM133065195

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