7 Option contracts Aa Aa ApliMedCo is a biotechnology compan

7. Option contracts Aa Aa ApliMedCo is a biotechnology company. One of its main products is an injection medicine called Pliatris, which is administered every month during the winter to at-risk infants (infants born prematurely and those born with congenital heart disease) to reduce their chance of acquiring a severe upper respiratory illness. A single Pliatris shot costs about $1,000, so this product represents a major revenue stream for the company. Suppose that on December 1,, ApliMedCo\'s share price is $32.96. On December 4, , Deborah reads in the papers that Japanese researchers are close to developing procedures that will eliminate a major cause of premature birth. If this research is fruitful, premature births will drop dramatically. Deborah does not own any ApliMedCo shares at the moment. Despite this, she pays $50 to enter into a contract that gives her the option to sell 1,000 ApliMedCo shares at $30 per share on June 30, NaN. Such a contract is known as a Suppose that on January 24, NaN, the American Academy of Pediatricians issues a recommendation that, in addition to at-risk infants, full-term infants less than six months old should also receive Pliatris shots every month during the winter. ApliMedCo\'s stock goes up to $40 per share on January 25, NaN. At this point, if Deborah has not yet exercised her option, which of the following is most likely to happen? Deborah will exercise her contract and sell 1,000 shares of ApliMedCo stock at $30 per share. O Deborah will pay another $50 to enter into another identical contract-one that gives her the option to sell 1,000 ApliMedCo shares at $30 per share anytime before June 30, NaN. O Deborah will do nothing.

Solution

Such a contract is known as a put option. (contract which gives an option to sell an asset at a predetermined price on a future date)

When prices go up put option would not be exercised - Deborah will do nothing (An asset can be sold at the going price which is higher than the exercise price of put option)