Explanation:
The correct answer is A. $0.
Explanation:
The payoff always ignores the cost of the option(s).
The payoff for each of these options at expiration can be calculated as follows:
For the bought put option with a strike price of $42:
As the stock price at expiration ($43) is higher than the strike price ($42), this option is out of the money, and Ahmet will not exercise it. Therefore, the payoff is $0.
For the sold put option with a strike price of $38:
Again, since the stock price at expiration ($43) is higher than the strike price ($38), this option is out of the money, and it will not be exercised by the option buyer. Therefore, the payoff for Ahmet is also $0.
Given these results, the total payoff for the strategy is $0 (0 + 0). This means Ahmet doesn't gain or lose anything from the options at expiration.
Q.771 Ahmet Gogh believes the price of the stocks of Red Bus Co. has more downside potential than upside potential. Therefore, he has purchased a European put option on the stock of Red Bus with a strike price of $42 and simultaneously sold a European put option with a strike price of $38. At expiration, the final price of the stock is $43. What is the payoff of the strategy?
A
$0
B
$1
C
$4
D
$5
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