The option contracts are given below; you are required to compute profit or loss to each investor : (i) Ravi writes a call option to buy share at an exercise price of ₹70 for a premium of ₹11 per share. The share price r
CS Executive · Securities Laws and Capital Markets · PYQS · December 2023
The option contracts are given below; you are required to compute profit or loss to each investor : (i) Ravi writes a call option to buy share at an exercise price of ₹70 for a premium of ₹11 per share. The share price rises to ₹73 by the time the option expires.
Answer & Explanation:
Analysis for Ravi (Writer of Call Option): Exercise Price (Strike Price) = ₹70 Premium Received = ₹11 per share Share Price at Expiry = ₹73 Since the share price at expiry (₹73) is higher than the exercise price (₹70), the buyer of the call option will exercise the option. Ravi, as the writer, is obligated to sell the share at the exercise price. Calculation of Profit/Loss for Ravi: Particulars Amount (₹) Premium Received +11 Loss on selling the share (Market Price - Exercise Price) -(₹73 - ₹70) = -3 Net Payoff (Profit) +8 Hence, Ravi, the writer of the call option, will have a profit of ₹8 per share .
Topics: Derivatives
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