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International Financial Management
Notes
Figure 8.1: Pay-off from a Call Option to the Option Holder
60
50
OPTION VALUE 40
30
20
10
0
0 20 40 60 80 100 120 140 160
SPOT PRICE OF STOCK
Stock price = ` 80 Stock price = ` 125
Worth of call option ` 0 ` 25
Put Option
Assume a European put option with the same exercise price. Whereas the call gives us the right
to buy a share for ` 100, the comparable put gives us the right to sell it for ` 100. Therefore,
circumstances in which the put will be valuable are just the opposite of those in which the call
will be valuable. This can be seen from the position diagram below. If the share price immediately
before expiration turns out to be greater than ` 100, nobody will want to sell the share at that
price; our put option will then be worthless. Conversely, if the share price turns out to be less
than ` 100, it will pay to buy the share and then take advantage of the option to sell it for ` 100.
In this case, the value of the put option at expiration is the difference between the ` 100 proceeds
of the sale and the market price of the share.
Figure 8.2: Pay-off from a Put Option to the Option Holder
100
80
OPTION VALUE 60
40
20
0
0 20 40 60 80 100 120 140 160
SPOT PRICE OF STOCK
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