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CA Final · Advanced Financial Management · Derivatives Analysis and Valuation

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 price is Rs 540. Ignoring transaction costs and time value of money, what is his net profit per share?

The net profit is Rs 20 per share. The call is exercised for an intrinsic value of Rs 40 (540 minus 500), and the Rs 20 premium paid at the start must be deducted, leaving a net gain of Rs 20.

  1. ARs 20Correct
  2. BRs 40
  3. CRs 60
  4. DRs 10

Explanation

Call payoff = 540 - 500 = Rs 40. Net profit = 40 - 20 premium = Rs 20. Rs 40 ignores the premium paid; Rs 60 wrongly adds the premium instead of subtracting it.

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