FRM Part I · FRM Exam Part I · Options Markets
An investor buys one European call option on 100 shares with a strike price of $50 for a premium of $3.20 per share. At expiry the share price is $56. Ignoring transaction costs and discounting, what is the investor's net profit on the position?
The net profit is $280. The call pays 56 minus 50, or $6 per share, and the investor paid $3.20 per share as premium. The net gain of $2.80 per share across 100 shares is $280. The $600 figure ignores the premium cost.
- A$280Correct
- B$600
- C$320
- D$920
Explanation
Payoff per share = max(56-50,0) = $6. Net profit per share = 6 - 3.20 = $2.80. For 100 shares, profit = $280. Choosing $600 ignores the premium paid; $320 is the premium alone; $920 adds the premium instead of subtracting it.
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