Question

premium	Expiration date	E or K (Strike price)	S0(Market price)
Call	0.05$/euro	April 2020	1.15$/euro	1.14$/euro
Put	0.03$/euro	April 2020	1.16$/euro	1.14$/euro

Suppose you bought a put, answer the following questions:

	premium	Expiration date	E or K (Strike price)	S0(Market price)
Call	0.05$/euro	April 2020	1.15$/euro	1.14$/euro
Put	0.03$/euro	April 2020	1.16$/euro	1.14$/euro

a. what is the intrinsic value of the put, what is the time value of the put, is the put in the money, out of the money or at the money?

b. what is your breakeven price? What is your net payoff when the market price is 1.07 dollar per euro.

Answer 1

Sol:

a)

• Intrinsic value of the put = Strike price - Underlying $/euro market price

= 1.16$/euro - 1.14$/euro

= 0.02$/euro

Therefore intrinsic value of put will be 0.02$/euro

• Time value of the put = Put premium - intrinsic value

= 0.03$/euro - 0.02$/euro

=0.01$/euro

Therefore time value of put will be 0.01$/euro

The put option is in the money as it has a positive intrinsic value.

b) Breakeven price for put = Strike price - Option premium cost

Breakeven price for put will be 1.16$/euro - 0.03$/euro = 1.13$/euro

Net payoff for put when the market price is 1.07 dollar per euro will be =

Total payoff = Strike price - market price

=1.16$/euro - 1.07$euro

=0.09$/euro

Net payoff will be = Total payoff - initial premium paid for put option

= 0.09$/euro - 0.03$/euro

= 0.06$/euro

Therefore Net payoff for put when the market price is 1.07 dollar per euro will be 0.06$/euro