Question

YOU CAN AVOID/IGNORE THE THE GRAPH AND CHART

Expiration date: December, 31 of current year. Forward price is $ 100. Strike price is $ 100 for options. Cost of options is $ 10 for put and for call. Consider a range of prices for I.B.M. on the expiration day: $ 0, $ 20, $ 40, $ 60, $ 80, $ 100, $ 120, $ 140, $ 160 ...per share.

Do a spreadsheet and a chart for the following (a through l), you can show ‘a-f’ on one chart and ‘g-l’ on a second chart:

Find expiration day payoff (ignore the cost of initial purchase) to a buyer of a) 1 call, b) 1 put, c) 1 forward

Find profit and loss (including the cost of initial purchase) to a buyer of g) 1 call, h) 1 put, i) 1 forward

Take the above charts that you printed and draw them by hand (this will clarify some of the patterns).

Answer 1

Payoff from forward Price of share on expiration

P&L Price of share on expiration - Price of Forward

Payoff from call max(0,Share price - Strike)

P&L max(0,Share price - Strike) - call cost

Payoff from put max(0,Strike-Share price)

P&L max(0,Strike-Share price) - put cost