NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives
An investor buys a call option on a stock with a strike price of Rs 500 by paying a premium of Rs 20 per share. At expiry the stock settles at Rs 540. What is the net profit per share to the buyer?
The net profit is Rs 20 per share. The call is worth Rs 40 at expiry (540 minus the 500 strike), and subtracting the Rs 20 premium paid leaves Rs 20. Ignoring the premium would give Rs 40, which overstates the profit.
- ARs 20Correct
- BRs 40
- CRs 60
- DRs 10
Explanation
Intrinsic value at expiry = 540 - 500 = Rs 40. Net profit = 40 - premium 20 = Rs 20. Rs 40 ignores the premium paid; Rs 60 wrongly adds the premium.
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