CMA Final · Strategic Financial Management · Options
A European call option on shares of Kaveri Auto has a strike price of Rs 500 and a premium of Rs 30. At expiry the share price is Rs 560. What is the net profit per share to the call buyer, ignoring transaction costs?
The net profit is Rs 30 per share. The call is worth Rs 60 at expiry (560 minus 500 strike), and the buyer paid a Rs 30 premium, so profit after deducting the premium is Rs 30.
- ARs 30Correct
- BRs 60
- CRs 90
- DRs 0
Explanation
Intrinsic value at expiry = 560 - 500 = Rs 60. Net profit = 60 - 30 premium = Rs 30. Rs 60 ignores the premium paid; Rs 90 wrongly adds the premium instead of subtracting it.
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