johnnyBuz

ADISON2000 Wrote:
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> Hi fellow L1 candidates,
>
>
> Also I do not understand how this out-of-the-money
> American put was worth 14 at the time of purchase
> (that is, option D):
>
> The current price of an asset is 100. An
> out-of-the-money American put option with an
> exercise price of 90 is purchased along with the
> asset. If the breakeven point for this hedge is
> at an asset price of 114 at expiration, then the
> value of the American put at the time of
> purchase must have been:
> A. 0.
> B. 4.
> C. 10.
> D. 14.

Both the asset and the put is purchased. At a price of 114 the profit from the asset = 114 - 100 = 14.
For breakeven we have:
profit from asset = loss on put

Put pays nothing, and the loss on it is 14 (ignoring discounting).

Hence price of put = 14.

NC