Question

The spot price of the market index is $900. After 3 months the market index is priced at $915. The annual rate of interest on treasuries is 2.4% (0.2% per month). The premium on the long put, with an exercise price of $930, is $8.00. Calculate the profit or loss to the short put position if the final index price is $915.

Answer 1

The exercise price is $930.

after 3 months the market index is at $915, exercise price is $930.

The put option holder, profits from the fall in price of the Index. So, here the put option holder has taken a short position, so he will gain if the Index price rises. So, he is losing in this position . So, he suffers a loss of $15 ($930 - $915 = -$15). As, he has received premium from the buyer of the put option , his net loss will be reduced.

So, the profit/loss on the final position is [-15 + 8*(1.002)^3] = LOSS of $6.95