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. Edit: Please explain. Thank you!
4? Breakeven for put option = S0- Exercie price+Premium Asset price = 100 Breakeven = 114 Exercise price = 90 Thus, Value of put option = 4 Correct me if I am wrong? If this was a out of money call option then, the answer would have been 14.
The answer is: D
Cavil’s right again. You buy an asset at 100 and the put at C to hedge your downside risk. The strike price doesn’t matter at all and is just there to throw you off. Break Even at 114, so 100 + P = 114 P = 14
okay…so i mixed call with put… Breakeven = S0+ Premium Thus, 114 = 100 + X X=14