The current price of an asset is 100. An out-of-the-money American put option with an exercise price of 90 is purchased along with the asset. If the breakeven point for this hedge is at an asset price of 114 at expiration, then the value of the American put at the time of purchase must have been: A. 0. B. 4. C. 10. D. 14. can someone please explain this with answer?
D: 14 Current price = $100. If the breakeven is $114, then the value of the American put is $114 - $100 = $14.
breakeven = cost price = sales price you paid a value for put + cost of buying the stock = cost basis / sales basis you paid a value for put + cost of buying the stock = 114 you paid a value for put + 100 = 114 value of put = 14
Current price = 100 Strike price =90 Now, final price = 114 Gain on asset = 114-100=14 Gain on put = 0 Net loss is price you paid for put option = p @breakeven, gain=loss ===> p=$14