1 answer

Problem 10-13 (LG 10-4) You have purchased a put option on Kimberly Clark common stock. The...

Question:

Problem 10-13 (LG 10-4) You have purchased a put option on Kimberly Clark common stock. The option has an exercise price of $

Problem 10-13 (LG 10-4) You have purchased a put option on Kimberly Clark common stock. The option has an exercise price of $68 and Kimberly Clark's stock currently trades at $69.18. The option premium is $1.28 per contract. One option equals 100 shares of the underlying stock. a. Calculate your net profit on the option if Kimberly Clark's stock price falls to $66 and you exercise the option. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations.) b. Calculate your net profit on the option if Kimberly Clark's stock price does not change over the life of the option. (Negative amount should be indicated by a minus sign.) a. Net profit b. Net profit

Answers

a. The net profit on the option if Kimberly Clark's stock price falls to $ 66 is computed as shown below:

Whenever we purchase a put option, we profit if the stock price falls. So in this case the net profit will be:

= Strike price - Stock price - option premium

= ( $ 68 - $ 66 - $ 1.28 ) x 100 shares

= $ 72

b. If the stock price does not change over the life of the option, the net profit will be as follows:

= Strike price - Stock price - option premium

= ( $ 68 - $ 68 - $ 1.28 ) x 100 shares

= - $ 128

Feel free to ask in case of any query relating to this question

.

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