CFA Level I · CFA Level I Exam · Pricing and Valuation of Options
A trader buys a European put option on a share for a premium of 3.00. The exercise price is 45. At expiration the share price is 38. The trader's profit per share, ignoring financing costs, is closest to:
The profit is about 4.00 per share. The put pays 45 minus 38, or 7, at expiration, and subtracting the 3.00 premium paid leaves a net profit of 4.00. Ignoring the premium gives 7, and adding it gives 10.
- A4.00Correct
- B7.00
- C10.00
Explanation
Put payoff = max(0, 45 - 38) = 7. Profit = payoff minus premium = 7 - 3 = 4. Choosing 7 ignores the premium paid; choosing 10 adds the premium instead of subtracting it.
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