FRM Part I · FRM Exam Part I · Trading Strategies
An investor owns a share priced at $80 and buys a 6-month European put with strike $75 for a premium of $3. Ignoring financing costs and dividends, what is the maximum loss per share on the protective put position at expiry?
The maximum loss is $8 per share. The investor pays $83 in total for the share and the put, and the put guarantees a minimum value of $75 at expiry. The $5 gap between price and strike plus the $3 premium gives $8.
- A$8Correct
- B$5
- C$3
- D$75
Explanation
Cost of stock plus put is 80+3=83. Minimum payoff at expiry is the strike 75 (if price falls below 75, put pays the difference). Maximum loss is 83-75=8. The $5 option ignores the premium; $3 counts only the premium.
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