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FRM Part I · FRM Exam Part I · Introduction to Derivatives

A trader writes a European put option on a stock with a strike of $40 and receives a premium of $2.50 per share. At expiry the stock price is $34. Ignoring discounting, what is the trader's net profit or loss per share?

The writer loses $3.50 per share. The put finishes $6 in the money, so the writer pays out $6, partly offset by the $2.50 premium received at the outset, giving a net loss of 6 minus 2.50, or $3.50.

  1. ALoss of $6.00
  2. BLoss of $3.50Correct
  3. CLoss of $8.50
  4. DProfit of $2.50

Explanation

The put holder exercises and the writer pays max(40 - 34, 0) = $6. Net result = premium received 2.50 minus 6.00 = -$3.50. Loss of $6 ignores the premium received; $8.50 adds the premium instead of subtracting it.

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