FRM Part I · FRM Exam Part I · Options Markets
A European call on a non-dividend-paying stock has strike $80 and a premium of $6. A European put on the same stock with the same strike and expiry has a premium of $4. A trader holds a long call and a short put. Ignoring discounting, at expiry the stock price is $78. What is the trader's net profit on the combined position?
The net result is a $4 loss. The long call expires worthless after costing $6. The short put is $2 in the money, so the trader pays $2 but kept $4 premium, gaining $2. Combined, -$6 plus $2 equals -$4 per share.
- A-$4Correct
- B-$2
- C$0
- D-$6
Explanation
Long call payoff at 78 is 0, cost $6. Short put: the put pays 80-78 = $2 owed by the trader, premium received $4. Net = (0-6) + (4-2) = -6 + 2 = -$4. Option -$2 ignores the call premium partly; -$6 ignores the put leg entirely.
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