Exercised the following diagram illustrates the

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Unformatted text preview: position of the buyer, the value of a call and put option can be illustrated as: Put option value to seller with a €18 exercise price Call option value to seller with a €18 exercise price €18 €20 €16 €18 €-2 €2 Share Price Share Price The total payoff of a option is the sum of the initial price and the value of the option when exercised. The following diagram illustrates the profits to buying a call option with an exercise price of €18 priced at €2 and a put option with an exercise price of €18 priced at €1.5. Download free ebooks at bookboon.com 76 Corporate Finance Options Profits to call option buyer Profits to put option buyer Break-even when stock price = €20 Break-even when stock price = €16.5 €-1.5 €-2 €18 €20 €16 €18 Share Price Share Price Note that although the profits to the call option buyer is negative when the difference between the share price and exercise price is between 0 and €2 it is still optimal to exercise the option as the value of the option is positive. The same holds...
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