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A put option in finance allows you to sell a share of stock at a given price in the future. There are different types of
A put option in finance allows you to sell a share of stock at a given price in the future. There are different types of put options. A European put option allows you to sell a share of stock at a given price, called the exercise price, at a particular point in time after the purchase of the option. For example, suppose you purchase a six-month European put option for a share of stock with an exercise price of $22. If six months later, the stock price per share is $22 or more, the option has no value. If in six months the stock price is lower than $22 per share, then you can purchase the stock and immediately sell it at the higher exercise price of $22. If the price per share in six months is $18.50, you can purchase a share of the stock for $18.50 and then use the put option to immediately sell the share for $22. Your profit would be the difference, $22 - $18.50 = $3.50 per share, less the cost of the option. If you paid $2.00 per put option, then your profit would be $3.50 - $2.00 = $1.50 per share. (a) Build a model to calculate the profit of this European put option. C 1 A B European Put Option 2 3 Parameters 4 Cost of Put Option $2.00 5 Exercise Price $22.00 6 Horizon 6 7 8 Price at End of Horizon $18.50 9 10 11 Model 12 Value of the Option =IF(B5>B8,B5-B8,0) 13 Cost of Put Option =B4 14 Profit per Option =B12-B13 15 (b) Construct a data table that shows the profit per share for a share price in six months between $10 and $30 per share in increments of $1.00. A B 16 Price at End of Horizon Profit 17 10 10 18 11 19 20 23 12 13 21 14 22 23 24 25 26 27 28 29 30 31 32 33 561622222222 17 18 19 20 23 24 34 27 35 28 36 29 37 30 38
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