Question

# The spot price of the market index is \$900. After 3 months the market

index is priced at \$920. The annual rate of interest on treasuries is 4.8% (0.4% per month). The premium on the long put, with an exercise price of \$930, is \$8.00. The breakeven price is \$ ? and max loss is?

Solved by verified expert

2.02

Step-by-step explanation

The reason why here in this case the option type is long call option. Generally long call
options will expect bullish market. Then only they can excute the contract and get profit. Where as the case was reversed and the bear market is going on.
The option was agreed for \$930
but here the index price \$920
When excute price is higher than its I index price no call option will be Excute and
simply the call option holder will loose the premium amount what he paid initially instead of excute the contract.
so the option holder will loss his \$2.00
But here we have to consider the interest effective rate on monthly @0.4%
=pv(1+r)^periods
=2(1.004)^3
=2.024096
approximately 2.02 loss.