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Assignment No.

2

In The Money-1. For a call option, when the option's strike price is below the market price of the underlying asset. 2. For a put option, when the strike price is above the market price of the underlying asset. Being in the money does not mean you will profit, it just means the option is worth exercising. This is because the option costs money to buy For Example-If John buys a call option on ABC stock with a strike price of $12, and the price of the stock is sitting at $15, the option is considered to be in the money. This is because the option gives John the right to buy the stock for $12 but he could immediately sell the stock for $15, a gain of $3. If John paid $3.50 for the call, then he wouldn't actually profit from the total trade, but it is still considered in the money.

At The Money-1. At-the-money Forward: An Option whose strike is set at the same level as the prevailing market price of the Underlying Forwardcontract. With a Black-Scholes model, the Delta of a European-style, at-themoney Forward Option Will be close to 50%. 2. At-the-money Spot: An Option whose strike is set the same as the prevailing market price of the Underlying. Because forwards commonly trade at a Premium or Discount to the Spot, the Delta may not be close to 50%.

For a put. The various situations for an option buyer are as follows: If Exercise price > Market Price Exercise price = Market Price Exercise price < Market Price Call buyer Out of the money Put buyer In the money At the money At the money In the money Out of the money . the $55 strike price would be considered to be an out-of-the-money call option. when an option's strike price is higher than the market price of the underlying asset. Example: If the stock of XYZ is trading at $50. An at-the-money option has little to no intrinsic value Out of the Money .For a call. when the strike price is below the market price of the underlying asset. An out-of-the-money call option is made up of entirely extrinsic value.An option is said to be “out-of-the-money” if exercising the option will result will result in loss. the $50 strike price for both puts and calls would be considered to be the atthe-money option strike price.Example: If the stock of XYZ is trading at $50.

if buyer it’s at the money to the writer as well. MP Situation Call buyer Put buyer 40 < 45 EP < MP money EP = MP In the money Out of the 40 = 40 At the money At the money 40 > 35 EP > MP Out of the money In the money . Will the position change if you had been a put buyer? What is the corresponding position for the call seller and the put seller? EP Vs. 40.What is the position if the current market price ( CMP ) is (a) Rs 45 (b) Rs 40 or (c) Rs 35. if the buyer it’s in the money to the writer. 6 with an exercise price of Rs. You bought a one-month call option at a premium pf Rs.The position is automatically reversed for options are essentially a zero sum game. the writer the deal is the deal is the deal is of the option since in the money to the out of the money to at the money to the For buyer Out of the money At the money In the money For Writer In the money At the money Out of the money Q 2. If buyer it’s out of the money to the writer.

the position is the reverse of what it is for the put buyer. A3. For the put seller. Identification of this price is crucial to take investment decision. if we equate the profit equation to zero and solve for the value of market price we would be sitting on the breakeven price.Breakeven price is determined in options as follows. For the call seller. How is Break-Even price determined in option contracts? Illustrate with suitable examples for both buyer and seller for call and put options. Breakeven price is therefore the market price at which the call buyer or the put buyer neither makes a profit nor incurs a loss. the position is the reverse of what it is for the call buyer.The option buyer premium of Rs. Call Put Buyer MP-EP-P=0 EP-MP-p=0 Seller EP-MP+P=0 MP-EP+P=0 . Q 3.6 is irrelevant being a sunk cost.

An Investor buys a call option with an exercise price of Rs. Hence BEP is Rs. Hence BEP is Rs. 10.Examples: 1. An investor buys a put option with an exercise price of Rs. What is the breakeven stock price? Thus Breakeven equation is MP-EP-P=0 MP – 100 – 10 = 0 MP = 110. What is the breakeven stock price? Thus Breakeven equation is EP-MP-p=0 200 – MP – 15 = 0 MP = 185. 100 for Rs. 15. 110 . 185 2. 200 for Rs.