Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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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:

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