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: Falls at ₹ 350.

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 price falls at ₹ 350 Since the price of the stock is below the exercise price of the Call, it will not be exercised. Only Put is valuable hence it will be exercised. Thus, Ending value = -₹ 3,500 + [(₹ 450 - ₹ 350) x 100] = -₹ 3,500 + 10,000 = ₹ 6,500 Net gain is ₹ 6,500

Topics: Derivatives

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