Purchase Solution

Put Option of Investors

Not what you're looking for?

Ask Custom Question

An investor buys a stock for $36. At the same time a 6 month put option to sell the stock for $35 is selling for $2.

a) What is the profit or loss from purchasing the stock if the price of the stock is $30? $35? $40?

b) If the investor also purchases the put (ie. Construct a protective put), what is the combined cash outflow?

c) If the investor constructs the protective put, what is the profit or loss if the price of the stock is $30? $35? Or $40 at the put's expiration?
At what price of the stock does the investor break even?

d) What is the maximum potential loss and maximum potential profit from this protective put?

e) If, after 6 months, the price of stock is $37, what is the investor's maximum possible loss?

Purchase this Solution
Solution Summary

The profit or loss from purchasing the stock of prices are determined. The maximum potential loss of profits is determined.

Solution Preview

a.
at 30, investor will lose 6 dollars since he bought it at $36
at 35, investor will lose 1 dollar since he bought it at $36
at 40, investor will make 4 dollars since he bought it at $36

b. the combined cash outflow = 36+2= $38

c.
at 30 = lost $6 ...

Purchase this Solution
Free BrainMass Quizzes
Introduction to Finance

This quiz test introductory finance topics.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

Organizational Behavior (OB)

The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.

MS Word 2010-Tricky Features

These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.

Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

View More Free Quizzes
Related BrainMass Solutions

  • Compare and contrast July 2011 and Jan 2012 option price P&G

    From the option chain, we can make a conclusion that investors are seeing a bull for P&G in 2012. Put: At K= $55, the put option is priced at $1.80, and 2 options are purchased out of 22502 options that are offered.

  • option prices for Proctor & Gamble

    That is the reason why they charged $13.83 to purchase this option, because if they lower the price of this strike price put option, investors will make money from this bargain which will lead to an arbitrage opportunity.

  • Garner Stock: Puts and Calls Options

    There is a put option on Garner stock that is at the money, with a premium of $1.80. Why would investors consider writing this call option and this put option? Why would some investors consider buying this call option and this put option?

  • International Finance: Options, Parity conditions

    Exercise price of put option= $1.60 You purchase the put option because you intend to sell the pounds You will exercise the put option if the spot price after 90days is below the exercise price Here the spot price is $1.53 which is less than

  • Option Tender Bonds

    The reason is that the put privilege acts as a floor under the market price of the bonds. This solution explains the utility of option tender bonds.

  • Multiple choice questions on earnings per share, derivatives (call and put options)

    Statements a and c are correct Which of the following statements is correct? 1. Put options give investors the right to buy a stock at a certain exercise price before a specified date 2.

  • Option Pricing Followup Questions

    If the call price violates this rule, investors can arbitrage by buying the call option and selling the stock short. The lower bound for the put is the reverse of that of the call.

  • Multiple Choice Questions on Options

    Which of the following statements is CORRECT? a. Put options give investors the right to buy a stock at a certain strike price before a specified date. b.

  • Describe the most common types of stock options and their ch

    Stock Options are very versatile and are very attractive to many investors. There two types of options, calls and puts. A call option enables the holder to buy the security while a put option enables the holder to sell the security.

View More Related Solutions