Skip to content

CA Final · Advanced Financial Management · Derivatives Analysis and Valuation

Anita Sharma holds 1,000 shares of Kaveri Ltd bought at Rs 300. To protect against a fall she buys 1,000 put options with strike Rs 290 at a premium of Rs 8 each. At expiry the share price is Rs 250. What is her net result on the combined position (shares plus put) relative to the purchase price of Rs 300, ignoring other costs?

The combined position loses Rs 18,000. The share falls Rs 50, the put pays Rs 40 (290 minus 250), and the Rs 8 premium is an extra cost, so the net loss is Rs 18 per share, or Rs 18,000 on 1,000 shares.

  1. ALoss of Rs 58,000
  2. BLoss of Rs 50,000
  3. CLoss of Rs 18,000Correct
  4. DLoss of Rs 42,000

Explanation

Per share: share loss = 300 - 250 = 50; put payoff = 290 - 250 = 40; premium = 8. Net loss = 50 - 40 + 8 = Rs 18, so Rs 18,000 for 1,000 shares. Rs 50,000 ignores the put entirely; Rs 42,000 omits the share loss offset incorrectly by subtracting premium instead of adding it.

Did you get it right without looking?

One question tells you little. A timed set on Derivatives Analysis and Valuation shows your real accuracy, how long you take and where you lose marks.

Practise Derivatives Analysis and ValuationFree diagnostic mock

More Derivatives Analysis and Valuation questions