CMA Final · Strategic Financial Management · Options
A call option on the shares of Kaveri Auto Ltd has a strike price of ₹480 and a premium of ₹22. The share price at expiry is ₹520. What is the net profit per share to the call buyer, ignoring transaction costs?
The call buyer earns ₹18 per share. The option is worth ₹40 at expiry (520 less strike 480), and after subtracting the ₹22 premium originally paid, the net gain is ₹18. Ignoring the premium would wrongly give ₹40.
- A₹18Correct
- B₹40
- C₹22
- D₹62
Explanation
Intrinsic value at expiry = 520 - 480 = ₹40. Net profit = 40 - 22 premium paid = ₹18. The option ₹40 ignores the premium paid, while ₹62 wrongly adds the premium instead of deducting it.
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