Question

10 Suppose that you buy a 3-month call for 100,000 widgets with a strike price of 7.26990 USD/Widget and pay a premium of 5 cents/Widget. Additionally, you enter into a short sale of 100,000 widgets at 6.64720 USD/Widget. At the time of maturity, the spot price is trading at 6.7137 USD/Widget. What are your profits/losses? 21,990.00 USD 15,340.00 USD 0-11,650.00 USD -18,360.00 USD

Answer 1

Ans. Option c

Cash inflow from short sales at price of $6.64720 USD/widget = 100000 widgets * 6.64720 = $664720

Now, as the strike price (7.26990 USD/widget) of the call option is more than the spot price (6.7137 USD/widget) at maturity, so, the option won't be excercised as it is beneficial to buy at spot price than at strike price, so,option premium of 5 cent/widget will be lost.

Thus, total loss from option premium = 5*100000 = 500000 cents or $5000

So, widgets will be bought in the spot market at the price of 6.7137 USD/widget,

=> Total cash outflow = 6.7137*100000 = $671370

Thus, total profit = Total cash inflow - Total cash outflow- Lost option premium

=> Total profit = 664720 - 671370 - 5000 = -$11650

Thus, there is a loss of $11650

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