FRM Part I · FRM Exam Part I · Introduction to Derivatives
An investor buys a European call option on a stock with a strike price of $50 for a premium of $3.00. At expiry the stock price is $56. Ignoring discounting and transaction costs, what is the investor's net profit per share?
The net profit is $3.00 per share. The call pays 56 minus 50, which is $6 at expiry, and the investor paid a $3 premium up front, so profit is the $6 payoff less the $3 cost.
- A$6.00
- B$3.00Correct
- C$9.00
- D-$3.00
Explanation
Payoff at expiry = max(56 - 50, 0) = $6. Net profit = payoff minus premium paid = 6 - 3 = $3. Choosing $6 ignores the premium paid; $9 wrongly adds the premium.
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