theprice of theunderlying asset is greater thanthe strike
price, the option will not be exercised and will expire
worthless.If,incontrast,thepriceoftheunderlyingassetis
lessthanthestrikeprice, theowneroftheput optionwill
exercise the option and sell the stock at the strike price,
claiming the difference between the strike price and the
marketvalueoftheassetasthegrossprofit.Again,netting
outtheinitialcostpaidfortheputyieldsthenetprofitfrom
the transaction.
Aputhasanegativenetpayoffifthevalueoftheunderlying
assetexceedsthestrikeprice,andhasagrosspayoffequalto
thedifferencebetweenthestrikepriceandthevalueofthe
underlyingassetiftheassetvalueislessthanthestrikeprice.
This is summarized inFigure A12.2.
FIGURE A12.2Payoff on Put Option
Determinants of Option Value
Thevalueofanoptionisdeterminedbysixvariablesrelating
to the underlying asset and financial markets: