CFA Level I · CFA Level I Exam · Derivative Instrument and Derivative Market Features
A trader writes a European call with a strike of 80 for a premium of 5 and simultaneously buys a European put on the same underlying with a strike of 80 for a premium of 4. At expiration the underlying is at 70. The trader's net profit on the two positions combined is closest to:
The net profit is 11. The written call expires worthless, so the 5 premium is kept. The purchased put pays 10 against a cost of 4, a profit of 6. Adding the two gives 11.
- A4
- B9
- C11Correct
Explanation
The short call expires worthless, so the trader keeps the 5 premium. The long put pays 80 − 70 = 10 and cost 4, a profit of 6. Total = 5 + 6 = 11. Answer 9 would result from treating the put payoff as 8 or ignoring a premium.
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