FRM Part I · FRM Exam Part I · Introduction to Derivatives
An investor holds a stock bought at USD 100 and simultaneously buys a European put with strike USD 95 for a premium of USD 4. Ignoring discounting and dividends, what is the investor's maximum possible loss per share at expiration?
The maximum loss is USD 9 per share. The protective put floors the stock's value at the USD 95 strike, a USD 5 loss from the USD 100 purchase price, and the USD 4 premium adds to it, totaling USD 9.
- AUSD 9Correct
- BUSD 4
- CUSD 5
- DUSD 95
Explanation
If the stock falls below 95, the put offsets further losses. Loss on stock to 95 is 5, plus 4 premium, giving a maximum loss of 9. USD 5 omits the premium, and USD 4 counts only the premium.
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