A strategy consists of longing a put on the market index with a strike of 830 and shorting a call option on the market index with a strike price of 830.The put premium is $18.00 and the call premium is $44.00.Interest rates are 0.5% per month.Determine the net profit or loss if the index price at expiration is $830 (in 6 months).

Question

Quizplus · Accepted Answer

The strategy involves longing a put and shorting a call, both with the same strike price of $830. The premiums for the put and call are $18.00 and $44.00, respectively. Since the index price at expiration is exactly at the strike price, both options expire worthless. Therefore, the initial net premium received is the call premium minus the put premium, which is $44.00 - $18.00 = $26.00. However, we must account for the time value of money over the 6-month period at a monthly interest rate of 0.5%. The future value of the net premium received can be calculated as $26.00 * (1 + 0.005)^6 = $26.79. Since this is a gain (the net premium received, adjusted for interest), the correct answer is a $26.79 gain.

A Strategy Consists of Longing a Put on the Market