【正文】 that is, the calls provide profits when stock prices increase. Purchasing puts, in contrast, is a bearish strategy. Symmetrically, writing calls is bearish, whereas writing puts is bullish. Because option values depend on the price of the underlying stock, purchase of options may be viewed as a substitute。Why might one characterize both buying puts and writing calls as “bearish” strategies? What is the difference between them?For each strategy, plot both the payoff and profit diagrams as a function of the final stock price.b. (iii) buy a put。Consider these four option strategies: (i) buy a call。Payoff and profit to call writers at expirationFigure s profit at expiration, net of the initial cost of the put.Put OptionsA put option is the right to sell an asset at the exercise price. In this case, the holder will not exercise the option unless the asset is worth less than the exercise price. For example, if FinCorp shares were to fall to $90, a put option with exercise price $100 could be exercised to clear $10 for its holder. The holder would purchase a share for $90 and simultaneously deliver it to the put option writer for the exercise price of $100.Payoff and profit to call option at expirationFigure Figure depicts the payoff and profit diagrams for the call writer. These are the mirror images of the corresponding diagrams for call holders. The breakeven point for the option writer also is $114. The (negative) payoff at that point just offsets the premium originally received when the option was written.p. 675Profits do not bee positive unless the stock price at expiration exceeds $114. The breakeven point is $114, because at that price the payoff to the call, ST ? X = $114 ? $100 = $14, equals the initial cost of the call.s value increases by $1 for each dollar increase in the stock price. This relationship can be depicted graphically as in Figure . Options are traded on Treasury notes and bonds, Treasury bills, certificates of deposit, GNMA passthrough certificates, and yields on Treasury and Eurodollar securities of various maturities. Options on several interest rate futures also trade. Among these are contracts on Treasury bond, Treasury note, municipal bond, LIBOR, Euribor,2 and Eurodollar futures.1Occasionally, this price may not match the closing price listed for the stock on the stock market page. This is because some NYSE stocks also trade on exchanges that close after the NYSE, and the stock pages may reflect the more recent closing price. The options exchanges, however, close with the NYSE, so the closing NYSE stock price is appropriate for parison with the closing option price.2The Euribor market is similar to the LIBOR market (see Chapter 2), but the interest rate charged in the Euribor market is the interbank rate for eurodenominated deposits. Values of Options at Expirationp. 674Call OptionsRecall that a call option gives the right to purchase a security at the exercise price. Suppose you hold a call option on FinCorp stock with an exercise price of $100, and FinCorp is now selling at $110. You can exercise your option to purchase the stock at $100 and simultaneously sell the shares at the market price of $110, clearing $10 per share. Yet if the shares sell below $100, you can sit on the option and do nothing, realizing no further gain or loss. The value of the call option at expiration equals where ST is the value of the stock at expiration and X is the exercise price. This formula emphasizes the option property because the payoff cannot be negative. That is, the option is exercised only if ST exceeds X. If ST is less than X, exercise does not occur, and the option expires with zero value. The loss to the option holder in this case equals the price originally paid for the option. More generally, the profit to the option holder is the value of the option at expiration minus the original purchase price. A currency option offers the right to buy or sell a quantity of foreign currency for a specified amount of domestic currency. Currency option contracts call for purchase or sale of the currency in exchange for a specified number of . dollars. Contracts are quoted in cents or fractions of a cent per unit of foreign currency.P 500 (the SPX), the NASDAQ 100 (the NDX), and the Dow Jones Industrials (the DJX), are the most actively traded contracts on the CBOE. Together, these contracts dominate CBOE volume.Futures OptionsOptions on the major indexes, that is, the Samp。In contrast to stock options, index options do not require that the call writer actually “deliver the index” upon exercise or that the put writer “purchase the index.” Instead, a cash settlement procedure is used. The payoff that would accrue upon exercise of the option is calculated, and the option writer simply pays that amount to the option holder. The payoff is equal to the difference between the exercise price of the option and the value of the index. For example, if the Samp。s 100 stock group. The weights are proportional to the market value of outstanding equity for each stock. The Dow Jones Industrial Index, by contrast, is a priceweighted average of 30 stocks.P 100 index is a valueweighted average of the 100 stocks in the Standard amp。P 500 or the NASDAQ 100. Index options are traded on several broadbased indexes as well as on several industryspecific indexes and even modity price indexes. We discussed many of these indexes in Chapter 2.s portfolio. For example, a call option writer owning the stock against which the option is written can satisfy the margin requirement simply by allowing a broker to hold that stock in the brokerage account. The stock is then guaranteed to be available for delivery should the call option be exercised. If the underlying security is not owned, however, the margin requirement is determined by the value of the underlying security as well as by the amount by w