Question

XYZ plc has been offered the following quotes for options on the dollar given a

current market price of 60 pence:

Strike Price of Dollar in Pence	Call Premium	Put Premium
	1 year	1 Year
62	6.9	3.0
64	5.9	3.8
66	4.8	4.5
67	4.5	5.1

a. Calculate the net payout from a purchased put option at a strike price of

66 pence for the following possible maturity prices 55p, 60p,65p,70p,75p.

Answer 1

A put options is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. A put option profits, when the stock price falls below the strike price.

Net Payoff of a put option = Max (0, Strike Price - Stock Price) - Put Premium

(i) Maturity price of 55p

Net Payoff of = Max (0, 66 - 55) - 4.5 = 11 - 4.5

Net Payoff = 6.5 (PROFIT)

(ii) Maturity price of 60p

Net Payoff of = Max (0, 66 - 60) - 4.5 = 6 - 4.5

Net Payoff = 1.5 (PROFIT)

(iii) Maturity price of 65p

Net Payoff of = Max (0, 66 - 65) - 4.5 = 1 - 4.5

Net Payoff = -3.5 (LOSS)

(iv) Maturity price of 70p

Net Payoff of = Max (0, 66 - 70) - 4.5 = 0 - 4.5

Net Payoff = -4.5 (LOSS)

(v) Maturity price of 75p

Net Payoff of = Max (0, 66 - 75) - 4.5 = 0 - 4.5

Net Payoff = -4.5 (LOSS)