Question

please do all the three questions and show me all the calculations step by step and the diagram also.

1. Assume you have purchased a June put option on British pounds: the strike price is $1.30/£; the option premium is $0.10/£; and it is European style.

1) Please fill out the blanks in the table.

Spot rate at maturity (in June)	Exercise or not?	Net profit or payoff
1.10
1.15
1.20
1.25
1.30
1.35
1.40
1.45

2) Where is the break-even point?

3) Please draw the payoff diagram to illustrate the payoff. Make sure to mark down the strike price, the break-even point, and the moneyness (in the money, at the money, and out of the money) on the diagram.

Answer 1

Put option means the right to sell

The holder of the option will exercise the option as long as the price of the option is higher than the spot price.

However the premium has already been paid. So the gain is (Strike Price- Spot Price- Premium paid)

In case the spot price is above the spot price the holder will not exercise the right and hence the only net loss will be the premium paid.