1. You buy a put option on a stock for a premium of $1. The exercise price is $1
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Question
1. You buy a put option on a stock for a premium of $1. The exercise price is $10.00. What is the option’s profit or loss if just prior to expiration the stock price is $9.50? a. $(0.50) b. $0 c. $0.50 d. $1.00 e. ($1.00) 2. In class I offered one of two trades: (1) you give me $0.25 and I’ll give you $0.50, or (2) you give me $1.00 and I’ll give you $1.50. What was the main point of this example? a. The impact of real options on the capital budgeting decision b. The many shortcomings of the payback rule c. The relationship between NPV and IRR d. The payoff of a typical call option e. The Monte Hall dilemmaExplanation / Answer
Answer 1 : answer "a" is right. That is $ (0.50).
We buy a put option of exercise price = $ 10
Premium on put option = $ 1
Profit & loss on stock price = $ 9.50
Breakeven point = 10-1 = $ 9.00
Loss on put option = $ (0.50).
Answer 2 : answer "c" is correct. That is example of the relationship between NPV nad IRR.
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