NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives
An investor buys one call option on a stock paying a premium of Rs 20 per share. The strike price is Rs 500 and the lot size is 100 shares. At expiry the stock is at Rs 560. What is the net profit to the buyer (ignoring costs)?
The net profit is Rs 4,000. The call's intrinsic value at expiry is Rs 60 per share (560 minus 500); deducting the Rs 20 premium leaves Rs 40 per share, which on a lot of 100 shares gives Rs 4,000.
- ARs 6,000
- BRs 4,000Correct
- CRs 2,000
- DRs 5,600
Explanation
Intrinsic value at expiry is 560 - 500 = Rs 60 per share. Net profit per share is 60 - 20 = Rs 40. For 100 shares this is Rs 4,000. Rs 6,000 ignores the premium paid.
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