Question

This morning, you put a European protective put strategy in place when the cost of ABC stock was $29.15 per share and the 1-year $30 ABC put was priced at $1.05 per share. How much profit or loss per share will you earn from this strategy if the stock is worth $28 a share on the put expiration date? A) −$2.2 B) −$1.05 C) −$.20 D) $1.15 E) $4.20

Answer 1

Answer:

C) −$0.20

Explanation:

Stock Price (So) = $29.15,  Po = $1.05

Initial outflow = So + Po = $29.15 + $1.05

Initial outflow = $30.20

Strike Price (k)  $30

Stock price at maturity (St) = $28

Payoff = max(k-st,0)

Payoff = max(30-28,0)

Payoff = max(2,0)

Payoff = $2

The stock on maturity is sold in the market for $28.

Total inflow = Payoff + Stock price on maturity

Total inflow = $2 + $28

Total inflow = $30

Profit = Total inflow - Initial outflow

Profit = $30 - $30.20

Profit = -$0.20