FRM Part I · FRM Exam Part I · Introduction to Derivatives
A trader writes (sells) a European put option on a stock with a strike of USD 40 and receives a premium of USD 2.50. At expiration the stock price is USD 34. Ignoring discounting, what is the trader's net profit or loss per share?
The writer loses USD 3.50 per share. The put finishes in the money by 40 minus 34, or USD 6, which the writer must pay, partly offset by the USD 2.50 premium received at the start.
- ALoss of USD 3.50Correct
- BLoss of USD 6.00
- CProfit of USD 2.50
- DLoss of USD 8.50
Explanation
The put holder exercises and gets max(40 - 34, 0) = 6, which the writer pays. Net = 2.50 received - 6.00 paid = -3.50. A loss of 6.00 ignores the premium received; a loss of 8.50 adds the premium instead of offsetting it.
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