FRM Part I · FRM Exam Part I · Options Markets
A stock trades at USD 100. An investor holds the stock and buys a European put with strike USD 95 for USD 2.00, financed by selling a European call with strike USD 110 for USD 2.00 (a zero-cost collar). At expiration the stock is at USD 120. What is the investor's total profit per share on the combined position, ignoring discounting and dividends?
The total profit is USD 10 per share. The stock gains USD 20, the purchased put expires worthless, and the written 110-strike call costs USD 10 at expiry. The premiums net to zero, so the collar caps the gain at 110 minus 100, or USD 10.
- AUSD 10Correct
- BUSD 20
- CUSD 15
- DUSD 0
Explanation
Stock gain is 120 - 100 = 20. The put expires worthless (premium net zero with the call premium). The short call costs 120 - 110 = 10. Premiums offset (-2 + 2 = 0). Total = 20 - 10 = 10. USD 20 ignores the short call.
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