FRM Part I · FRM Exam Part I · Trading Strategies
An investor buys a strangle: a European put with strike USD 90 for USD 1.50 and a European call with strike USD 110 for USD 2.50, same expiry. Ignoring discounting, what is the investor's net profit if the stock ends at USD 120 at expiry?
The net profit is USD 6. The call pays USD 10 as the stock finishes at USD 120 against a USD 110 strike, the put expires worthless, and the combined premium paid of USD 4 is subtracted from the payoff.
- AUSD 6Correct
- BUSD 10
- CUSD 4
- DUSD 16
Explanation
The put expires worthless. The call pays 120 - 110 = USD 10. The total premium paid is 1.50 + 2.50 = USD 4. Net profit = 10 - 4 = USD 6. Forgetting the premium gives 10, and subtracting the premium twice or similar errors give other values.
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