IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Financial instruments and insurance contracts as cashflow models
An investor buys a European put option on a share with strike Rs 200 for a premium of Rs 12. At expiry the share price is Rs 185. Ignoring interest on the premium, what is the investor's net profit per share?
The net profit is Rs 3 per share. The put pays 200 minus 185, which is Rs 15, and the premium of Rs 12 paid at the start must be deducted. Ignoring the premium would give Rs 15, and adding it would give Rs 27.
- ARs 15
- BRs 3Correct
- CRs 12 loss
- DRs 27
- Rs 3 loss
Explanation
The put payoff is max(200-185,0) = 15. Net profit = 15 - 12 = 3 per share. Rs 15 ignores the premium paid, and Rs 27 wrongly adds it.
Did you get it right without looking?
One question tells you little. A timed set on Financial instruments and insurance contracts as cashflow models shows your real accuracy, how long you take and where you lose marks.
More Financial instruments and insurance contracts as cashflow models questions
- Which statement best describes how an ordinary equity share differs from a fixed-interest bond as a cashflow model?
- An investor in India enters a long forward contract to buy 100 shares of a company at a delivery price of Rs 500 per share, to be settled in…
- An investor buys a European put option on a share with strike Rs 250 for a premium of Rs 12. At expiry the share price is Rs 230. Ignoring i…
- Cashflows of Rs 1,000 at time 1 and Rs 2,000 at time 2 (in years) are valued at an effective annual rate of 10%. What is the present value, …
- Meera deposits ₹10,000 at the end of each year for 3 years into an account earning 5% effective annual interest. What is the accumulated val…
- A perpetuity pays ₹12,000 at the end of each year, forever. The effective annual rate of interest is 8%. A second arrangement pays ₹12,000 a…