CFA Level I · CFA Level I Exam · Derivative Instrument and Derivative Market Features
A trader buys a put option on a share with an exercise price of $50 for a premium of $3. At expiration the share price is $42. The trader's profit on the long put, ignoring financing costs, is closest to:
The put pays 50 minus 42, which is $8 at expiration. Subtracting the $3 premium paid gives a profit of $5. Ignoring the premium gives $8, and adding it gives $11, both of which are wrong.
- A$5Correct
- B$8
- C$11
Explanation
Payoff = max(0, 50 - 42) = $8. Profit = payoff minus premium = 8 - 3 = $5. The $8 figure ignores the premium paid, and $11 wrongly adds the premium instead of subtracting it.
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