Uriverse Airlines Ltd. a listed company is operating domestic and international flights from India. Recently a news is flashing that virus might be effecting the entire world and governments may advise people to stay at
CS Executive · Capital Markets & Securities Laws · PYQS · June 2021
Uriverse Airlines Ltd. a listed company is operating domestic and international flights from India. Recently a news is flashing that virus might be effecting the entire world and governments may advise people to stay at home till the situation improves. It is expected that share price will probably fall dramatically. To protect this an investor has bought the put option. He purchased one 3 months put (lot size 100 shares) with a striking price of ₹40 for ₹1 per share. Determine the investors' ending position if the price of the stocks fall to ₹36 in 3 months.
Answer & Explanation:
Cost of Put Option = (₹1 per share) x (100 share put) i.e. = ₹100 The price of the stock falls to ₹36. Since, the market price is lower than the strike price, the investor will gain as below: = (₹4 per stock gain on put) x 100 Gain = ₹400 Net Profit = Gain minus Cost of put = ₹400 - ₹100 or Therefore, Net Profit = ₹300
Topics: Derivatives