FRM Part I · FRM Exam Part I · Properties of Options
An investor buys one European call option on a share with a strike price of $50 for a premium of $3. At expiry the share trades at $58. Ignoring discounting and transaction costs, what is the investor's net profit per share?
The net profit is $5 per share. The call pays $8 at expiry because the share finishes $8 above the $50 strike, and the $3 premium paid up front must be deducted from that payoff.
- A$3
- B$5Correct
- C$8
- D$11
Explanation
The call payoff is max(58 - 50, 0) = $8. Subtracting the $3 premium paid gives a net profit of $5. The $8 figure ignores the premium, and $11 wrongly adds the premium to the payoff.
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