CMA Final · Strategic Financial Management · Options
An investor buys a share of Godavari Ltd. at ₹200, buys a put with strike ₹190 for ₹6 and sells a call with strike ₹220 for ₹8 (a collar). What is the maximum profit per share and maximum loss per share at expiry?
Maximum profit is ₹22 and maximum loss is ₹8 per share. The net premium received is ₹2. Above ₹220 the gain is 20 plus 2, and below ₹190 the loss is 10 minus 2.
- AProfit ₹22, loss ₹8Correct
- BProfit ₹22, loss ₹12
- CProfit ₹18, loss ₹8
- DProfit ₹20, loss ₹10
Explanation
Net premium received = 8 - 6 = ₹2. Maximum profit: price at or above 220 gives 20 + 2 = ₹22. Maximum loss: price at or below 190 gives -10 + 2 = -₹8. Option with loss 12 ignores the net premium received and subtracts it wrongly.
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