IAI Actuarial Core Principles · Economic Modelling · Principles of option pricing
An investor buys a call with strike Rs 100 for Rs 6 and sells a call with strike Rs 120 for Rs 2, both on the same share and expiry. Ignoring interest, what is the maximum profit of this position at expiry?
The maximum profit is Rs 16. A bull call spread has a maximum payoff equal to the strike difference of Rs 20, reached when the share is at or above Rs 120, and the net premium cost is Rs 4, so profit is 20 - 4 = 16.
- ARs 20
- BRs 16Correct
- CRs 4
- DRs 24
- Rs 14
Explanation
This is a bull call spread. The maximum payoff is 120 - 100 = 20 when S is at least 120. Net premium paid is 6 - 2 = 4. Maximum profit = 20 - 4 = 16. Option A ignores the net premium.
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