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 250 for a premium of Rs 12. At expiry the share price is Rs 230. Ignoring interest on the premium, what is the investor's net profit per share?
The net profit is Rs 8 per share. The put is exercised because the price of Rs 230 is below the Rs 250 strike, giving a payoff of Rs 20. Deducting the Rs 12 premium paid at the start leaves a net gain of Rs 8.
- ARs 20
- BRs 8Correct
- CRs 12 loss
- DRs 32
- Rs 8 loss
Explanation
The put payoff is max(250 - 230, 0) = 20. Net profit is payoff less premium: 20 - 12 = 8. Rs 20 ignores the premium paid.
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