| Course | GF561 Derivatives and Hedging |
|---|---|
| Unit | Unit 2 |
| Paper type | Payoff diagram exercise |
| Length | About 900 words, 6 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | MS in Finance |
| Updated | October 2026 |
Free sample paper for GF561 Unit 2
Seven Positions on One Grid: A Unit 2 Payoff Diagram Exercise With Breakevens and Limits
[Student Name]
Purdue University Global
GF561: Derivatives and Hedging
Unit 2 Payoff Diagram Exercise
[Instructor Name]
[Date]
The share and every price are illustrative, consistent with a 4 percent rate and about 30 percent volatility; the textbooks cited are real.
The Supplied Terms
A share trades at $60. All contracts expire in six months. The strike for both options is $60. The call costs $5.63, the put costs $4.45, and the six-month forward price is $61.21. Each chart plots profit at expiry, payoff less the premium paid or plus the premium received, against share prices from $40 to $80. The premium appears as a vertical shift of the payoff line (Hull, 2022).
Chart 1: Long Call
Shape. Flat at a loss of $5.63 for all prices up to $60, then rising one dollar for each dollar above $60.
Breakeven. $65.63, the strike plus the premium.
Largest loss. $5.63, the premium, at any price at or below $60.
Largest gain. Unlimited as the share rises.
Chart 2: Short Call
Shape. The mirror image: a flat gain of $5.63 up to $60, then falling one dollar per dollar above it.
Breakeven. $65.63.
Largest gain. $5.63. Largest loss. Unlimited.
Chart 3: Long Put
Shape. Falling one dollar per dollar as the price drops below $60, flat at a loss of $4.45 above it.
Breakeven. $55.55, the strike less the premium.
Largest loss. $4.45. Largest gain. $55.55, if the share falls to zero.
Chart 4: Short Put
Shape. A flat gain of $4.45 above $60, falling below it.
Breakeven. $55.55. Largest gain. $4.45. Largest loss. $55.55, if the share falls to zero.
Chart 5: Long Forward
Shape. A straight line through zero at $61.21, gaining one dollar per dollar above it and losing below it. No premium is paid.
At the edges of the grid. A loss of $21.21 at $40 and a gain of $18.79 at $80.
Largest loss. $61.21, if the share falls to zero. Largest gain. Unlimited.
Chart 6: Short Forward
Shape. The mirror line, gaining below $61.21 and losing above it. A gain of $21.21 at $40 and a loss of $18.79 at $80.
Chart 7: Covered Call Over Short Put
Covered call. Own the share bought at $60 and sell the call for $5.63. Below $60 the position loses one dollar per dollar, reaching a loss of $14.37 at $40. Above $60 the gain is capped at $5.63, because any rise in the share is given back on the call.
Short put. A flat gain of $4.45 above $60, a loss of $15.55 at $40.
The overlay. The two lines have the same shape, a kinked line that rises until $60 and is flat above it, and they sit $1.18 apart at every price.
The covered call and the short put are the same bet on the share, giving up gains above $60 to collect a premium, and the constant $1.18 gap between them is the interest earned on the $60 strike over six months, which is exactly what put-call parity predicts.
Why the Lines Run Parallel
Put-call parity says that a call less a put equals the share price less the present value of the strike. Here, $5.63 less $4.45 is $1.18, and $60 less $60 discounted for six months at about 4 percent, roughly $58.81, is about $1.19. Rearranged, owning the share and selling the call is equivalent to selling the put and holding cash equal to the strike's present value. The two strategies differ only in that cash, which earns the interest that shows up as the gap (Hull, 2022).
Summary Table
Collecting the limits in one list makes the positions comparable before any of them is priced (McDonald, 2013).
1. Long call: breakeven $65.63; largest loss $5.63; largest gain unlimited.
2. Short call: breakeven $65.63; largest gain $5.63; largest loss unlimited.
3. Long put: breakeven $55.55; largest loss $4.45; largest gain $55.55.
4. Short put: breakeven $55.55; largest gain $4.45; largest loss $55.55.
5. Long forward: breakeven $61.21; largest loss $61.21; largest gain unlimited.
6. Short forward: breakeven $61.21; largest gain $61.21; largest loss unlimited.
7. Covered call: breakeven $54.37; largest gain $5.63; largest loss $54.37.
What the Seven Charts Show Together
Read side by side, the charts sort into two families. Options have kinked lines, with risk limited on one side, and their buyers pay for that limit with a premium. Forwards have straight lines with no premium and no limit on either side. Every short position is the mirror of a long one, so whatever one party gains at expiry the other loses, before premiums. That symmetry is why a grader can check a short position's caption simply by reversing the signs on the long one.
Checking the Captions Against the Lines
Each caption was checked by reading its line at three prices: $40, $60 and $80. For the long call, the line reads a loss of $5.63 at $40 and $60, and a gain of $14.37 at $80, matching a breakeven of $65.63. For the covered call, the line reads a loss of $14.37 at $40, a gain of $5.63 at $60 and the same $5.63 at $80. Agreement between the line and the sentence is what the exercise tests, so every caption figure above was read from its chart rather than computed separately (Bodie et al., 2024).
References
Bodie, Z., Kane, A., & Marcus, A. J. (2024). Investments (13th ed.). McGraw Hill.
Hull, J. C. (2022). Options, futures, and other derivatives (11th ed.). Pearson.
McDonald, R. L. (2013). Derivatives markets (3rd ed.). Pearson.
The Purdue Global GF561 Unit 2 instructions
Unit 2 of GF561 asks you to draw and describe payoff diagrams for basic derivative positions. Use one grid and one set of terms for every chart. For each position, long and short calls, puts and forwards, describe the line's shape, the breakeven price, the largest gain and the largest loss, and make sure the caption matches what the line shows. Decide whether you are plotting payoff or profit and label it, showing premiums as vertical shifts. Then combine positions as the prompt asks, such as a covered call beside a short put, and explain the relationship between them with a pricing principle. Summarize the limits in one table. Check each caption by reading the line at several prices. Cite the course text and a second derivatives text in APA 7.
Inside the GF561 Unit 2 example
Supplied terms open the sample, along with the choice to plot profit with premiums as shifts, citing Hull. Six charts follow, each with labeled shape, breakeven, largest gain and largest loss, including the forward's edge values of a $21.21 loss at $40 and an $18.79 gain at $80. Chart 7 lays the covered call over the short put, and the highlighted sentence identifies the $1.18 gap as interest on the strike. A section on why the lines run parallel works through put-call parity. A summary table, citing McDonald, collects all seven limits. A section on what the charts show together sorts options from forwards, and a final section explains how each caption was read from its line at $40, $60 and $80, citing Bodie, Kane and Marcus.
Reading the GF561 Unit 2 grading rubric
Grading in this GF561 exercise centers on agreement between each diagram and its caption. Graders check breakevens, largest gains and largest losses against the lines, so a correct chart with a wrong caption still loses points. Consistent treatment of premiums, plotted as profit with a clear label, earns the next share. The combination chart is where analytical credit concentrates: explaining why a covered call and a short put behave alike, using put-call parity, shows understanding beyond drawing. Instructors in the MS in Finance program value a summary table that makes the positions comparable. A documented checking step, clean presentation and APA 7 references round out the marks.
Common GF561 Unit 2 mistakes, and how to avoid them
The most common GF561 Unit 2 error is a caption that disagrees with its line, often a breakeven computed as strike minus premium for a call or strike plus premium for a put. Students also mix payoff and profit charts in one set without labeling them. Forwards are drawn crossing zero at the spot price instead of the forward price. Short positions are described with limited losses when they are unlimited. The combination chart is drawn without explaining why the lines are parallel. Whatever terms your prompt supplies, keep the same discipline: one grid, labeled profit or payoff, shape, breakeven and limits for each position, a reasoned combination and a check.
Get a GF561 Unit 2 example written to your instructions
Whatever underlying, strikes and premiums the GF561 Unit 2 prompt supplies can travel with the rubric; mention it if charts must come from a spreadsheet. Every position is drawn from its formula and captioned in matching words, and the summary table is attached. The first custom sample, free, is generally ready in 24-48h. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.
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GF561 Unit 2 questions, answered
Should my charts show payoff or profit?
Whichever your prompt names, labeled on the axis. Payoff ignores the premium and shows only what the position is worth at expiry, while profit subtracts what was paid or adds what was received. The sample plots profit and traces the payoff line lightly underneath, so a grader using either definition finds the answer without anything being redrawn.
Why does the forward line not cross zero at the spot price?
Because the forward price already includes the cost of carrying the share for six months. At a 4 percent rate that lifts 60 to 61.21, so the long forward breaks even there. The sample states this beside the chart; it is a small detail that prompts often test, and it previews the cost-of-carry pricing in the next unit.
Can I draw the diagrams by hand?
Many sections accept hand-drawn charts scanned into the document, provided the axes are labeled and every kink sits at a strike. The sample uses spreadsheet charts for precision, but grading turns on correct shape, clear labels and captions that match the lines. If your rubric names a format, the custom version follows it.
Where can I find a free GF561 Unit 2 sample paper?
This page holds a full GF561 Unit 2 payoff diagram exercise on a $60 share, with seven positions, breakevens, largest gains and losses, a put-call parity overlay and APA 7 references.
Why are the covered call and short put lines $1.18 apart?
Put-call parity makes a long share plus a short call equal to a short put plus cash worth the present value of the strike. The interest on that cash over six months, about $1.18 here, is the gap.