So, instead of the option is worth $50, we would say it's worth 50 minus this So, it'd be worth $40. But, we have to incorporate the fact that you paid 10 dollars for the option. So, the stock is worth nothing, you can buy it for nothing, and then if you have the option, sell it for $50. Let's do the same thing for the profit/loss version. because why would you excercise the right to sell something at $50, while in the open market you can sell it at $100. If the stock is $100 or something like that, there's no way you could exercise the option. And if the stock goes anything above %50, it's still worthless. You don't really doesn't have any value anymore. The value of the put option could start at $50, because you have the right to sell something worthless at $50, if the stock's going bankrupt After $50, it becomes the option. At $50 you wouldn't really care you have the right to sell something at $50, which you could buy for $50.
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So, the value of the option becomes less and less, as the value of the stock becomes more and more, up until you you get to $50. And anyone who's holding the option would make instant $40. If you had the option, you would excercise the option to sell it for $50, so you would make $40. If the underlying stock price is $10, then you could still go to buy the stock for $10. So you would definitely excerise it, and you'd make a lot of money the underlying stock can be bought for $0, the put option is now worth $50, because you can buy it for 0 and sell it for 50 dollars. What is the put option worth? You would now go on the market, buy it for almost $0, and then you would exercise your put option and then you would sell it for $50. At expiration the stock is trading at $0, the company went bankrupt. Remember, this is the right to sell the stock at $50. And the other one will actually draw a profit and loss based-on that option position, so incorporate the price you actually paid for the option. This is what you tend to see in academic settings like business schools or textbooks. However, it is important to note that the convenience yield is a non cash item, but rather reflects the market's expectations concerning future availability of the commodity.We have company ABCD trading at $50 a share Let's draw a payoff diagram for a put option with a $50 strike price trading at $10 So once again we get to draw two types of payoff diagrams One type that only cares about the value of the option at expiration. Since the convenience yield provides a benefit to the holder of the asset but not the holder of the forward, it can be modelled as a type of 'dividend yield'. The value of a forward position at maturity depends on the relationship between the delivery price ( K is the convenience yield over the life of the contract.
![short payoff vs profit forward short payoff vs profit forward](https://www.researchgate.net/publication/269829589/figure/fig2/AS:669203182915595@1536561880445/Profit-profile-collar-with-receivable-including-Source-own-research_Q320.jpg)
9 Theories of why a forward contract exists.8.1 Extensions to the forward pricing formula.
![short payoff vs profit forward short payoff vs profit forward](https://www.oreilly.com/library/view/python-for-finance/9781787125698/graphics/B06175_10_32.jpg)
![short payoff vs profit forward short payoff vs profit forward](https://www.researchgate.net/publication/288588054/figure/fig1/AS:581058798538753@1515546621333/Payoff-and-profit-profile-of-a-long-call-and-short-put_Q640.jpg)
The price agreed upon is called the delivery price, which is equal to the forward price at the time the contract is entered into. The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position. In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed on at the time of conclusion of the contract, making it a type of derivative instrument.