FRM Part I · FRM Exam Part I · Trading Strategies
An investor holds a stock bought at $100 and writes a 1-year call with strike $110 for $6, and buys a put with strike $95 for $4 (a collar). Ignoring financing and dividends, what are the maximum profit and maximum loss per share at expiry?
Maximum profit is $12 and maximum loss is $3 per share. The collar nets a $2 premium received. Upside is capped at the $110 strike, a $10 gain plus $2; downside is floored at the $95 strike, a $5 loss offset by $2.
- AMaximum profit $12; maximum loss $3Correct
- BMaximum profit $10; maximum loss $5
- CMaximum profit $16; maximum loss $5
- DMaximum profit $12; maximum loss $7
Explanation
Net premium received is 6-4=2. Maximum profit: (110-100)+2=12. Maximum loss: (100-95)-2=3 when the price is at or below 95. $10/$5 ignores the net premium; $16 wrongly adds the call premium only.
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