A strategy consists of buying a market index product at $830 and longing a put on the index with a strike of $830.If the put premium is $18.00 and interest rates are 0.5% per month,compute the profit or loss from the long index position by itself expiration (in 6 months)if the market index is $810.

Question

Quizplus · Accepted Answer

The long index position by itself would result in a loss of:
$830 - $810 = $20

The put option would result in a gain of:
Strike price - Market price - Premium
$830 - $810 - $18 = $2

To calculate the profit/loss from the strategy, we need to subtract the cost of the put ($18) from the total gain from the put ($2) and long index position (-$20):
$2 - $18 - $20 = -$36

However, we also need to adjust for the time value of money using the interest rate:
-$36 / ((1+0.005)^6) = -$45.21

Therefore, the best choice is A, as the strategy results in a loss of $45.21 at expiration.

A Strategy Consists of Buying a Market Index Product at $830