The result of assembly election of major State will be announced in next week. Naresh an investor, wants to take the opportunity only with limited risk as outcome of election result might be negative. Kamal, one of his f

CS Executive · Securities Laws and Capital Markets · PYQS · December 2024
The result of assembly election of major State will be announced in next week. Naresh an investor, wants to take the opportunity only with limited risk as outcome of election result might be negative. Kamal, one of his friends, is regularly deals in option contracts, Kamal advised him to take position in following option contracts in PQR Ltd. (Assume the option lot size is 100): Purchase one lot with 1-month call option, with a premium of ₹ 30 with an exercise price of ₹ 550. Purchase one lot with 1-month put option, with a premium of ₹ 5 with an exercise price of ₹ 450. PQR Ltd. share is currently traded at ₹ 500. Calculate the net pay off position of Naresh at the expiry of option, if the price of PQR Ltd. share happens to be: No change in price

Answer & Explanation:

Total premium paid on purchasing a call and put option = (₹ 30 per share x 100) + (₹ 5 per share x 100) = ₹ 3,000 + ₹ 500 = ₹ 3,500 Net Pay-off if there is no change in price In this case, Naresh exercises neither the Call option nor the Put option as both will result in a loss for him. Thus, Ending value = -₹ 3,500 + Zero gain = - ₹ 3,500 i.e. Net loss is ₹ 3,500

Topics: Derivatives

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