CFA Level I · CFA Level I Exam · Forward Commitment and Contingent Claim Features and Instruments
An investor buys a put option on a share for a premium of 3 with an exercise price of 40. At expiration the share trades at 32. The investor's profit, net of the premium, is closest to:
The profit is about 5. The put is exercised for a payoff of 40 minus 32, which is 8, and subtracting the 3 premium paid leaves 5. Ignoring the premium gives 8, and adding it gives 11, both incorrect.
- A5Correct
- B8
- C11
Explanation
The put payoff is max(40 - 32, 0) = 8. Subtract the premium of 3 to get a profit of 5. The value 8 ignores the premium, and 11 wrongly adds the premium instead of subtracting it.
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