The ABC Company expects stock prices to decrease. The current stock price is $96
ID: 2743240 • Letter: T
Question
The ABC Company expects stock prices to decrease. The current stock price is $96. The company purchases a put option, with exercise price of $93 and a premium of $3 per share. Just before the expiration, stock price rises to $91. Should the investor exercise the put option or not? What will the total payoff per share be? Do not exercise, total payoff = -$2 per share Do not exercise, total payoff = -$1 per share Exercise, total payoff = -$1 per share Exercise, total payoff = $1 per share Exercise, total payoff = $2 per share
Explanation / Answer
Ans is Exercise , total payoff = $ -1
Current Stock price = 91
Strik price = 93
If Put option exercised then profit made = 93-91=2
Total payoff= profit made - premium paid = +2-3=-1
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