1.3 European put Assume that the value of the stock price is So >0.1 Assume that
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1.3 European put Assume that the value of the stock price is So >0.1 Assume that the value of the strike price is K> 0.ler-to) A European put trades today (time to) at a market price = PV(K)-0.1. ·We formulate a trading strategy as follows: (a) buy the put, (b) borrow money froin a bank. The initial value of our portfolio is zero. Find a scenario where this strategy leads to a profit. Find a scenario where this strategy leads to a loss. Note: if we exercise the put option, we must buy the stock at the market price on the exercise date, to deliver to the writer of the put 1.4 American put Assume that the value of the stock price is S > 0.1. Assume that the value of the strike price is K0.le (r-to) An American put trades today (time to) at a market price K-0.1. ·we formulate a trading strategy as follows: (a) buy the put, (b) borrow money fron a bank. The initial value of our portfolio is zero. Find a scenario where this strategy leads to a profit. . Find a scenario where this strategy leads to a loss. Note: if we exercise the put option, we must buy the stock at the market price on the exercise date, to deliver to the writer of the put.Explanation / Answer
Major difference between American and European Options
Owners of American options may exercise at any time before the option expires, while owners of European options may exercise only at expiration.
European Put Option
an option to sell assets at an agreed price on a particular date
Stock price So >0.1
Strike price K >0.1er(T-to)
European put trades today at =PV(K)-0.1
Strategy: Buy put and borrow money from bank.
Scenario when strategy leads to profit :
Buy put means we are the holder of the put option when we hold we had a right to sell the underlying asset.
when the strike price is greater than the spot price on the day of exercise of the option then the option will be exercised.And moreover the stike price of the option should compensate premium paid to hold the option then strtegy leads to the profit.
Scenario when strategy leads to loss :
On the date of exercise the strike price is less than the spot price
American options:
Option can exercise at any time before the option expires.
Scenario when strategy leads to Profit :
Before the lapse of option the strike price of the option greater than the spot price on the day of exercise then strategy leads to the profit and moreover the strike price should compensate the premium paid for the exercise of the option.
Scenario when strategy leads to loss :
Before the expiry of the option the strike price never grater than the price of the underlying asset then strtegy leads us to loss.
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