FRM Part I · FRM Exam Part I · Introduction to Derivatives
An investor buys one European call option on a stock with a strike price of USD 50 for a premium of USD 3.00. 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 3.00 per share. The call pays 56 minus 50, which is USD 6 at expiration, and the investor paid a USD 3 premium upfront, so subtracting the premium leaves a profit of USD 3.
- AUSD 3.00Correct
- BUSD 6.00
- CUSD 9.00
- DUSD 2.00
Explanation
Payoff at expiry = max(56 - 50, 0) = 6. Net profit = 6 - 3 premium = 3. USD 6.00 ignores the premium paid, while USD 9.00 wrongly adds the premium instead of subtracting it.
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