Question

For each of the derivative instruments from a Forward contract, Call option, Put Option, give a...

For each of the derivative instruments from a Forward contract, Call option, Put Option, give a formula for the payoff from the long side of the contracts. Then draw the associated payoff diagrams. The x-axis should be the ending stock price and the y-axis should be the payoff.

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Answer #1

Forward contract

The value of a forward position at maturity is the difference between the delivery price K and the underlying price ST at the time of maturity.

For a long position, the payoff is ST - K , and it benefit from a higher underlying price.

Long Call Option

Payoff = Max [0,stock price (ST) - strike price (k) ]

Profit = Max [0,stock price (ST) - strike price (k) ] - premium (C0)

Long Put Option

Payoff = Max [0,strike price (k) - stock price (ST) ]

Profit = Max [0,strike price (K) - stovk price (ST) ] - premium (P0)

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