FRM Part I · FRM Exam Part I · Trading Strategies
A trader buys a 6-month put with strike $45 for $5 and sells a 6-month put with strike $35 for $2 on the same stock. Ignoring discounting, what is the breakeven stock price at expiration?
The breakeven price is $42. The bear put spread costs a net $3, and between the strikes its payoff equals $45 minus the stock price. Setting 45 minus S equal to 3 gives S of $42.
- A$38
- B$40Correct
- C$42
- D$43
Explanation
This is a bear put spread with net cost 5 - 2 = $3. The payoff at a price S between 35 and 45 is 45 - S. Breakeven requires 45 - S = 3, so S = $42. Checking: payoff 3 equals cost 3. Wait, recompute: S = 42.
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