FRM Part I · FRM Exam Part I · Options Markets
An investor buys one European call option on a stock with a strike price of USD 50 for a premium of USD 3.20. At expiration the stock trades at USD 56. Ignoring discounting and transaction costs, what is the investor's net profit per share?
The net profit is USD 2.80 per share. The call pays 56 minus 50, or USD 6.00, at expiration, and the investor paid a USD 3.20 premium up front, so profit is 6.00 minus 3.20, which equals USD 2.80.
- AUSD 2.80Correct
- BUSD 6.00
- CUSD 3.20
- DUSD 9.20
Explanation
Payoff at expiry is max(56 - 50, 0) = 6.00. Net profit subtracts the premium paid: 6.00 - 3.20 = 2.80. USD 6.00 ignores the premium, and USD 9.20 wrongly adds it.
Did you get it right without looking?
One question tells you little. A timed set on Options Markets shows your real accuracy, how long you take and where you lose marks.
More Options Markets questions
- A portfolio manager holds a stock at $100 and buys a 1-year European put with strike $95 for $4, financing it by selling a 1-year European c…
- Which statement about an option's intrinsic value and time value is correct for a European-style call option that is currently out of the mo…
- A non-dividend-paying stock trades at $50. A European call with strike $50 and six months to expiry is priced at $4.00. The continuously com…
- 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 pri…
- An investor buys a European put on a non-dividend stock with strike $45 for a premium of $2.50. At expiry the stock price is $41. What is th…
- A stock trades at $80 and a call option on it has a strike price of $75. Which description of the option's moneyness and intrinsic value is …