FRM Part I · FRM Exam Part I · Trading Strategies
An investor buys a 3-month call with strike $40 for $5.00 and sells a 3-month call on the same stock with strike $50 for $2.00. What is the maximum profit at expiration, ignoring discounting and transaction costs?
The maximum profit is $7.00. The bull call spread costs $3.00 net, and its largest payoff is the $10 strike difference when the stock finishes at or above $50. Subtracting the net premium from the maximum payoff gives $7.00.
- A$3.00
- B$7.00Correct
- C$10.00
- D$13.00
Explanation
This is a bull call spread with net cost 5 - 2 = $3.00. The maximum payoff is the strike difference of $10, reached when the stock is at or above $50. Maximum profit is 10 - 3 = $7.00. The $10.00 option ignores the net premium paid.
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