CMA Final · Strategic Financial Management · Options
A European call on shares of Kaveri Motors has a strike price of Rs 450 and is trading at a premium of Rs 28. At expiry the share price is Rs 500. Ignoring transaction costs and time value of money, what is the net profit per share to the call buyer?
The net profit is Rs 22 per share. The call is exercised for an intrinsic value of Rs 50 (500 minus 450), and the buyer's Rs 28 premium must be deducted from this gain to get the net result.
- ARs 22Correct
- BRs 50
- CRs 28
- DRs 78
Explanation
Intrinsic value at expiry = 500 - 450 = Rs 50. Net profit = 50 - premium paid 28 = Rs 22. Rs 50 ignores the premium paid; Rs 78 wrongly adds the premium instead of deducting it.
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