Answer Happy

Question 5 A put option is a contract giving the owner the right, but not the obligation, to sell, or sell short, a specified amount of an underlying security at a pre-determined price within a specified time frame. The pre-determined price the put option buyer can sell at is called the strike price. Put options are traded on various underlying assets, including stocks, currencies, bonds, commodities, futures, and indexes. a) Suppose that an American put option to sell a share for S$20 costs S$5 and is held until March. Under what circumstances will the seller of the option make a profit? Under what circumstances will the option be exercised? (4 Marks) b) Suppose that you own 2,000 shares worth S$20 each. How can put options be used to provide you protection against the decline in the value of your holding shares over the next four months? (4 Marks) (Total: 8 Marks)