FRM Part I · FRM Exam Part I · Trading Strategies
An investor buys a 3-month European call with strike $50 for $6 and sells a 3-month European call on the same stock with strike $60 for $2. Ignoring discounting, what is the maximum profit of this position at expiration?
The maximum profit is $6. The position is a bull call spread costing a net $4, and its largest payoff is the $10 strike difference, reached when the stock finishes at or above $60. Profit is $10 minus the $4 net premium.
- A$4
- B$6Correct
- C$10
- D$14
Explanation
This is a bull call spread. Net cost = 6 - 2 = $4. Maximum payoff = 60 - 50 = $10 when the stock is at or above $60. Maximum profit = 10 - 4 = $6. The $10 figure ignores the net premium paid.
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