You own a plot of land valued a $200,000. You will sell the land one year from n

Question

You own a plot of land valued a $200,000. You will sell the land one year from now. You have also bought a one-year European put option on this plot of land for $13.000. The put option has an exercise price of SI 90.000. and expires in one year. The annual standard deviation of land values is 30% and the risk-free rate is 5%. Calculate the net profit or loss, at option expiration to your COMBINED land and put portfolio for each of the following year-end land values: $180.000 $190,000 $200,000 $210,000 Calculate the net profit or loss, at option expiration to the seller of the put option, for each of the following year-end land values. $180,000 $190,000 $200,000 $210.000 What should be the price of a one-year European call option on the same plot of land, with the same exercise price?

Explanation / Answer

Profit loss of put option Breakeven Point - Stock Price at Expiration Breakeven Stock Price Put Option Strike Price - Premium Paid 190000-13000 177000 177000 180000 -3000 177000 190000 -13000 177000 200000 -23000 177000 210000 -33000 For option seller 180000 177000 3000 190000 177000 13000 200000 - 210000 - as per put call parity formula C = P+S+Pv(x) 32047.62 13000+200000-(190000/1.05)

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