FRM Part I · FRM Exam Part I · Options Markets
An investor buys a European put on a non-dividend stock with strike $45 for a premium of $2.50. At expiry the stock price is $41. What is the investor's net profit per share, ignoring financing costs?
The net profit is $1.50 per share. The put pays 45 minus 41, or $4, at expiry, and subtracting the $2.50 premium paid at purchase leaves a profit of $1.50.
- A$1.50Correct
- B$4.00
- C$6.50
- D-$2.50
Explanation
Payoff at expiry is max(45 - 41, 0) = $4. Net profit subtracts the $2.50 premium paid: 4 - 2.5 = $1.50. Ignoring the premium gives $4.00, and adding it gives $6.50, which is the wrong sign.
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