A. A week ago Peter purchased 7 American put option contract on TESCO for f3.75

Question

A. A week ago Peter purchased 7 American put option contract on TESCO for f3.75 per option per share. This contract expires in 4 r onths. At the same tirne Peter also owns 7,000 shares of TESCO. The following data is available to Peter's position Tesco's share price on the date of purchased: Option Strike Price: Tesco's current share price: Risk Free Rate (continuously compounded): Volatility (annualised): Days to Expiry: C72,00 72.00 LG2VSO 3.60% 20% 60 days Given the above information, answer the following questions (a) sing Black Scholes compute the value of the put option today (the risk fren rate given is the continuously compoundinR rate and us time to expiration as 2/12 years), (6 Marks) the diagram) (3 Marks) and maximie his ret should he exercise te put or should he resell it in (b)Draw the relevan profi expiry dagrom (indicate the break even pont on (c) Gven only on the data bvPer wants to unwind his position today the market? (3 Mark (d) Calculate the net profit/los of his option position from the date of option

Explanation / Answer

a Current share price (S) = 62.5 Annual stock price volatality (s) 32% Annual continuely compounding risk free interest rate (r)= 0.036 Time to expiry (t) = 60 days = 0.167 years Strike price (k) = 72 Call option = SN (d1)- Ke(-rt)N(d2) d1= In(S/K)+ (r+S2/2)t/ S Route t = (62.5/72)+(0.036+ (0.32)2/2) * 0.167/ 0.32*0.4082 = 1.388 d2= d1- s route t= 1.388- 0.32*0.4082 = 1.2574 Call option = 62.5*-72* SN(d1)- Ke(-rt)N(d2) = 1.1974 d Loss of the option = (3.75-1.1974)*7000 12432 c He should excise put option

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