CMA Final · Strategic Financial Management · Options
A European call option on shares of Tata Motors has a strike price of ₹900 and a premium of ₹45. The call is held to expiry, when the share price is ₹990. What is the net profit per share to the call buyer, ignoring transaction costs?
The net profit is ₹45 per share. The call is worth 990 minus 900, which is ₹90 at expiry, and the buyer paid a premium of ₹45 earlier, so the profit after deducting the premium is ₹45.
- A₹45Correct
- B₹90
- C₹135
- D₹0
Explanation
Intrinsic value at expiry = 990 - 900 = ₹90. Net profit = 90 - premium 45 = ₹45. Option ₹90 ignores the premium paid; ₹135 wrongly adds the premium instead of subtracting it.
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