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FRM Part I · FRM Exam Part I · Options Markets

An investor writes 5 naked call contracts (100 shares each) on a stock priced at $40, with a strike of $45 and premium of $2 per share. Using the CBOE-style rule, the initial margin is the greater of (A) 100% of option proceeds plus 20% of the underlying value less the out-of-the-money amount, and (B) 100% of option proceeds plus 10% of the underlying value. What is the initial margin required?

The required initial margin is the larger of two calculations. The first gives $2,500 and the second gives $3,000, so the requirement is $3,000. The first calculation deducts the out-of-the-money amount, but the second applies a 10% floor on the underlying value.

  1. A$1,600
  2. B$3,000
  3. C$2,600Correct
  4. D$4,000

Explanation

Shares: 500. Proceeds = 500 x $2 = $1,000. (A) 1,000 + 0.2 x 40 x 500 (=4,000) - (45-40) x 500 (=2,500) = 2,500. (B) 1,000 + 0.1 x 20,000 = 3,000. Greater is 3,000, so the answer is $3,000... check: option labels.

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