PQ established the following spread on the AB Corporation's stock: Purchased one 3-month call option with a premium of ₹30 and an exercise price of ₹550. Purchased one 3-month put option with a premium of ₹5 and an exerc

Total premium paid on purchasing a call and put option: = (₹30 per share x 100 shares) + (₹5 per share x 100 shares) = ₹3,000 + ₹500 = ₹3,500 (i) Stock Remains at ₹500 after 3 months In this case, PQ exercises neither the call option (strike ₹550 > market ₹500) nor the put option (strike ₹450 < market ₹500) as both will result in a loss if exercised. Ending Value = (Total premium paid) + (Gains from options) Ending Value = ₹3,500 + ₹0 = ₹3,500 Therefore, net loss = ₹3,500 (ii) Stock falls to ₹350 after 3 months Since the price of the stock (₹350) is below the exercise price of the call (₹550), the call will not be exercised. Only put option is valuable and is exercised. Gain from put option = (Exercise Price - Market Price) x Number of shares = (₹450 - ₹350) x 100 = ₹100 x 100 = ₹10,000 Ending Value = (Total premium paid) - (Gain from put option) Ending Value = ₹3,500 - ₹10,000 = -₹6,500 (This is a gain, so the formula in the solution is (Premium Paid) - (Gain from option) which is incorrect. It should be Gain from option - Premium Paid) Let's re-calculate based on standard profit/loss calculation: Profit/Loss = Gain from options - Premium Paid Profit/Loss = ₹10,000 - ₹3,500 = ₹6,500 (Net Gain) The provided solution states: Ending Value = (₹3,500) + [(₹450-₹350)x100] = (₹3,500) + ₹10,000 = ₹6,500. This seems to be calculating the total value of the position, not the net gain/loss. If ₹3,500 is the cost, and ₹10,000 is the gain, then the net gain is ₹6,500. The wording 'Ending Value' is confusing here, but 'Therefore net gain = ₹6,500' clarifies it. (iii) Stock raises to ₹600 after 3 months In this case, the put option (strike ₹450 < market ₹600) is worthless since the price of the stock exceeds the put option's exercise price. Only call option is valuable and is exercised. Gain from call option = (Market Price - Exercise Price) x Number of shares = (₹600 - ₹550) x 100 = ₹50 x 100 = ₹5,000 Profit/Loss = Gain from options - Premium Paid Profit/Loss = ₹5,000 - ₹3,500 = ₹1,500 (Net Gain) The provided solution states: Ending Value = (₹3,500) + [(₹600-₹550)x100] = (₹3,500) + ₹5,000 = ₹1,500. Similar to above, this is confusing, but 'Therefore net gain = ₹1,500' clarifies it.