Problem 2:

The current stock of STC is selling for $45 and the exercise price of a put option is $50, and premium is $1 .calculate the value of this put option? if the market price of stock became $55 at exercise date ? What type of put is it?

Solution:

Intrinsic value represents the value that the buyer could extract from the option if he or she exercise the option immediately

The value of the put option= exercise price (Xp) market price (Ps) premium

The value of the put option = 50-45-1=$4

Here Ps < Xp (market price less than exercise price), so that this put is in the money put option which means (should be exercise)

If the stock price became $55 in the market at exercise date, the option is not execute because the exercise price < market price

this put option is out of the money put option which means (should not be exercise).