Problem:
You expect Company XYZ stock prices to decrease below the current stock price level of $50. In order to take advantage of this expectation, you purchase a put option on Company XYZs stock, with an exercise price of $45 and a premium of $3 per share.
Required:
Question: Just before the expiration, stock price drops to $40. Should you exercise the put option? What will the total payoff per share be?
Note: Explain all calculation and formulas.