Consider contracts (call, put, forward) on 1 share of I.B.M.
Expiration date: December, 31 of current year. Forward price is $ 100.
Strike price is $ 100 for options. Cost of options is $ 10 for put and for call.
Consider a range of prices for I.B.M. on the expiration day:
$ 0, $ 20, $ 40, $ 60, $ 80, $ 100, $ 120, $ 140, $ 160 ...per share.
Do a spreadsheet and a chart using for the following:
Find expiration day payoff (ignore the proceeds of initial sale) to a seller of
1. A) 1 call, B) 1 put, C) 1 forward
Find profit and loss (including the proceeds of initial sale) to a seller of
2. A) 1 call, B) 1 put, C) 1 forward
Take the above charts that you printed and draw them by hand.
Note: Contracts on foreign currencies are conceptually similar; these diagrams (or charts) will also help you with hedging foreign exchange risk.