FRM Part I · FRM Exam Part I · Properties of Options
An investor buys a European put option on a stock with a strike price of $50 and pays a premium of $3.00. At expiration the stock trades at $42. What is the investor's net profit per share, ignoring financing costs?
The net profit is $5.00 per share. The put pays 50 minus 42, which is $8, and the investor paid a $3 premium, so profit is 8 minus 3. Forgetting the premium gives $8, and adding it gives $11, both wrong.
- A$5.00Correct
- B$8.00
- C$3.00
- D$11.00
Explanation
The put payoff is max(50 - 42, 0) = $8. Net profit is the payoff minus the premium paid: 8 - 3 = $5. The $8 figure ignores the premium, and $11 wrongly adds the premium instead of subtracting it.
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