NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives
Mr. Rao holds 1,000 shares of an Indian company priced at Rs 500 each. He buys 10 lots of put options (lot size 100) on the stock with strike Rs 480, paying a premium of Rs 12 per share. If the stock falls to Rs 400 at expiry, what is his net value of the combined position (shares plus puts), after considering the premium?
The net value is Rs 4,68,000. Shares are worth Rs 4,00,000, the put pays Rs 80,000 because strike 480 exceeds 400 by Rs 80 on 1,000 shares, and the premium of Rs 12,000 is deducted from the total.
- ARs 4,68,000Correct
- BRs 4,80,000
- CRs 4,00,000
- DRs 3,88,000
Explanation
Shares are worth 1,000 x 400 = Rs 4,00,000. Put payoff = (480-400) x 1,000 = Rs 80,000. Premium paid = 12 x 1,000 = Rs 12,000. Net = 4,00,000 + 80,000 - 12,000 = Rs 4,68,000. Rs 4,80,000 ignores the premium; Rs 3,88,000 subtracts the premium without adding the put payoff.
Did you get it right without looking?
One question tells you little. A timed set on Understanding Derivatives shows your real accuracy, how long you take and where you lose marks.
More Understanding Derivatives questions
- Rohan holds 1,000 shares of an Indian company, currently priced at Rs 500 each. He buys one put option contract covering 1,000 shares with a…
- Which statement best describes the margin mechanism that protects the clearing corporation against default in futures trading?
- Which of the following best describes the effect of a rise in implied volatility, other factors unchanged, on the premium of options?
- Which statement best describes the cost of carry model for pricing stock futures on a non-dividend-paying stock?
- Which statement best describes the key difference between a futures contract and a forward contract in India?
- In the context of exchange-traded equity derivatives, what is the main purpose of the initial margin collected from a futures trader?