CFA Level I · CFA Level I Exam · Pricing and Valuation of Options
An investor writes a European call option with an exercise price of 80 and receives a premium of 4. At expiration the underlying trades at 90. The writer's profit per unit is closest to:
The call writer loses about 6 per unit. The holder exercises and collects 90 minus 80, or 10, from the writer, who earlier received a premium of 4. The net result is 4 minus 10, which equals a loss of 6.
- A-10
- B-6Correct
- C-4
Explanation
The writer pays max(0, 90 - 80) = 10 to the holder. Net result = premium received 4 minus payoff 10 = -6. Choosing -10 ignores the premium; -4 loses only the premium sign-flipped and ignores the payoff.
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