Problem 3 PRICES AT CLOSE MARCH 23, 2006 IBM (IBM) Strike Last 8.50 Expiration Apr May Jul Oct Apr 1.10 May 0.75 Underlying stock price: 83.20 Call Put Open Open Volume Interest Last Volume Interest 201 2568 0.10 27 19877 239 0.20 29 170 1 962 0.50 30 9616 1 378 56 541 1390 19671 0.55 3378 32086 174 215 1052 513 57 4357 1.44 234 10156 5 892 2.20 79 1114 2221 42456 2.45 1548 16330 331 1300 2.90 676 959 570 19451 3.50 103 7963 9 1073 804 989 21447 6.80 146 587 7 348 6.80 26 89 353 17257 7.00 670 792 2516 4587 7.40 25 194 75.00 75.00 75.00 75.00 80.00 80.00 80.00 80.00 85.00 85.00 85.00 85.00 90.00 90.00 90.00 90.00 Jul Oct Apr May Jul Oct Apr May Jul Oct 10.10 11.10 4.10 4.40 5.50 7.30 0.95 1.35 2.59 4.10 0.15 0.25 0.85 2.15 On March 23rd an investor expects the IBM stock to decrease sharply until May. You propose to him to take a position today on a May put option on IBM stock with a strike price of $ 85. 1) What is time value and intrinsic value of this option today? 2) What will be your profit If IBM stock at the end of May is priced at $106? 3) What is the stock price that makes the buyer of the put option breakeven? 4) What will be your profit If IBM stock at the end of May is priced at $72? 5) Plot the value of the IBM put 85 May as a function of the price of the underlying stock. What is the payoff at expiration