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CFA Level I · CFA Level I Exam · Derivative Instrument and Derivative Market Features

An investor buys a European call option on a share. At expiration, the call is most likely to have a payoff that is:

The payoff of a long call at expiration is the greater of zero and the share price minus the exercise price. If the share price is at or below the exercise price, the option expires worthless and pays zero. The buyer's loss is limited to the premium.

  1. Anegative if the share price is below the exercise price
  2. Bequal to the premium paid, regardless of the share price
  3. Czero if the share price is at or below the exercise priceCorrect

Explanation

A call buyer has the right but no obligation to buy. The payoff at expiration is max(0, S - X), so it is zero when the share price is at or below the exercise price. It is never negative, because the buyer simply lets the option expire. The premium is paid at the start and is not the payoff.

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