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An investor buys a European put on a share for $3. The stock price is $42 and the strike
Chapter 10, Problem 10.1(choose chapter or problem)
An investor buys a European put on a share for $3. The stock price is $42 and the strike price is $40. Under what circumstances does the investor make a profit? Under what circumstances will the option be exercised? Draw a diagram showing the variation of the investors profit with the stock price at the maturity of the option.
Questions & Answers
QUESTION:
An investor buys a European put on a share for $3. The stock price is $42 and the strike price is $40. Under what circumstances does the investor make a profit? Under what circumstances will the option be exercised? Draw a diagram showing the variation of the investors profit with the stock price at the maturity of the option.
ANSWER:Problem 10.1
An investor buys a European put on a share for $3. The stock price is $42 and the strike price is $40. Under what circumstances does the investor make a profit? Under what circumstances will the option be exercised? Draw a diagram showing the variation of the investors profit with the stock price at the maturity of the option.
Step by Step Solution
Step 1 of 3
The profit of the long put = 
The put buyer option will make more gain or will provide more benefit when the price of stocks will end below the strike price by the amount of premium paid by the investor.
The investor will make a profit when the price of the stock will be below $40 by more than $3 which means that the price of the stock will be below $37.