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CA Final · Advanced Financial Management · Derivatives Analysis and Valuation

Vikram buys a call with strike Rs 100 for a premium of Rs 6 and a put with the same strike, same expiry on the same share for a premium of Rs 4 (a long straddle). What are the break-even share prices at expiry?

The break-even prices are Rs 90 and Rs 110. The straddle costs a total premium of Rs 10, so the share must move that much above or below the Rs 100 strike for the payoff to cover the cost.

  1. ARs 94 and Rs 106
  2. BRs 90 and Rs 110Correct
  3. CRs 96 and Rs 104
  4. DRs 100 only

Explanation

Total premium = 6 + 4 = Rs 10. Upper break-even = 100 + 10 = 110; lower break-even = 100 - 10 = 90. Rs 94 and Rs 106 use only the call premium, which is the wrong base.

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