CFA Level I · CFA Level I Exam · Forward Commitment and Contingent Claim Features and Instruments
Which of the following best describes the maximum loss and maximum gain for the buyer of a European put option on a non-dividend-paying share with exercise price X and premium p?
The put buyer's maximum loss is the premium p, and the maximum gain is X minus p, reached if the underlying falls to zero. The gain is capped because an asset price cannot go below zero, unlike a long call, which has unlimited upside.
- AMaximum loss is p; maximum gain is X - pCorrect
- BMaximum loss is p; maximum gain is unlimited
- CMaximum loss is X - p; maximum gain is p
Explanation
The put buyer can lose only the premium p. The best case is the underlying falling to zero, giving payoff X and profit X - p. Gain is limited, not unlimited, because price cannot fall below zero.
Did you get it right without looking?
One question tells you little. A timed set on Forward Commitment and Contingent Claim Features and Instruments shows your real accuracy, how long you take and where you lose marks.
More Forward Commitment and Contingent Claim Features and Instruments questions
- Which of the following instruments is best described as a forward commitment?
- A fund manager expects to invest cash in floating-rate deposits and wants protection against falling rates while keeping the benefit if rate…
- A fund manager enters a long forward contract to buy 1,000 units of an asset at 50 per unit. At expiry, the spot price is 56 per unit. The p…
- A trader holds a long position in a futures contract. The futures price rises during the day. At the daily settlement, the trader's margin a…
- Compared with a forward contract, a futures contract is most likely to feature:
- A credit default swap has a notional principal of $10 million and a standard coupon of 1% per year. After a credit event, the auction-determ…