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Exercise 1. An investor has a short position in a European put on a share for $4. The stock price is $40 and the strike
Exercise 1. An investor has a short position in a European put on a share for $4. The stock price is $40 and the strike price is $41 (a) Under what circumstances will the option be exercised? (b) Under what circumstance does the investor make a profit? (c) Draw a payoff diagram plotting the investor's payoff as a function of Sr. (d) Draw a profit diagram plotting the investor's profit as a function of Sr. (e) Suppose now the investor enters also into a long position of put option with strike price $39. This put is on the same underlying and has the same maturity time. Describe the total payoff to the trader, via a payoff table or payoff diagram
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