CA Final · Advanced Financial Management · Derivatives Analysis and Valuation
Kavita buys a call with strike Rs 200 for premium Rs 12 and a put with the same strike and expiry for premium Rs 8 on the same stock (long straddle). What are the two break-even prices at expiry?
The break-evens are Rs 180 and Rs 220. A long straddle costs a combined premium of Rs 20, so the stock must move more than Rs 20 above or below the Rs 200 strike for the position to be profitable.
- ARs 180 and Rs 220Correct
- BRs 188 and Rs 212
- CRs 192 and Rs 208
- DRs 200 only
Explanation
Total premium paid = 12 + 8 = Rs 20. Upper break-even = 200 + 20 = Rs 220; lower = 200 - 20 = Rs 180. Rs 188 and Rs 212 use only the call premium of 12, a missed adjustment.
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.
More Derivatives Analysis and Valuation questions
- Rohit Mehra buys one call option on a Nifty-linked stock with a strike price of Rs 500 and pays a premium of Rs 20. At expiry the stock pric…
- Shares of Kaveri Auto trade at ₹100. Over the next period the price will move either to ₹120 or to ₹80. A one-period European call has a str…
- The share of Narmada Autos is priced at ₹500. After one period it will be either ₹600 or ₹400. The one-period risk-free rate is 8%. What is …
- A stock is priced at ₹100. In each of two periods it can rise by 20% or fall by 20%. The risk-free rate is 10% per period. Using the two-per…
- Meridian Textiles Ltd has entered a plain vanilla interest rate swap on a notional principal of ₹50 crore. It pays a fixed rate of 8% p.a. a…
- Meera constructs a bull call spread on a stock: she buys a call with strike Rs 200 at a premium of Rs 14 and sells a call with strike Rs 220…