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Old 11-06-2019, 03:20 PM
jubair07 jubair07 is offline
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Default Max Value of Option/Forward

From ASM:





What I don't get is, why is the maximum value of (50 - S) = 0?

And how does S>59.16 works? Aren't they short forward and put option, so anything less than 50 or 55 means profit and over 59.16 means loss for both of them?
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Old 11-06-2019, 08:18 PM
Abraham Weishaus Abraham Weishaus is offline
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Quote:
Originally Posted by jubair07 View Post
From ASM:





What I don't get is, why is the maximum value of (50 - S) = 0?
Where do you see that statement?

Quote:
And how does S>59.16 works? Aren't they short forward and put option, so anything less than 50 or 55 means profit and over 59.16 means loss for both of them?
Yes, they both lose money if S>59.16, but the short forward loses more in that range. When S is lower than 50, they both are profitable but the forward's profit is higher, both because the forward price is higher than the strike price and because it is free.
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Old 11-07-2019, 03:20 AM
jubair07 jubair07 is offline
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Originally Posted by Abraham Weishaus View Post
Where do you see that statement?


Yes, they both lose money if S>59.16, but the short forward loses more in that range. When S is lower than 50, they both are profitable but the forward's profit is higher, both because the forward price is higher than the strike price and because it is free.
Thanks for the reply.

It says:

Quote:
This is not greater than 55 - S unless max(0, 50 - S)= 0 or S>=50
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Old 11-07-2019, 11:06 AM
Abraham Weishaus Abraham Weishaus is offline
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Originally Posted by jubair07 View Post
Thanks for the reply.

It says:
max(0,50-S) is equal to one of two things: either it is equal to 0 or it is equal to 50-S. If it is equal to 50-S, there is no way that 50-S>55-S. Having eliminated the 50-S alternative, we're left with only the 0 alternative.
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Old 11-07-2019, 04:13 PM
jubair07 jubair07 is offline
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Thanks for the explanation!
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