CFA CFA Level 1 Question of the Week – Derivatives

Question of the Week – Derivatives

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    • Avatar of AdaptPrepAdaptPrep
      Participant
        • Undecided
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        5
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        The break-even point for this option is $43, meaning
        that the stock must drop from $50 to $43 within the next four months. It is
        entirely possible that such a situation could
        happen (which is why the put is worth $5), but chances are that it won’t happen. In that case, Jonathan is most likely to make a
        profit.

        Note that while it is less
        likely for Stephen to make a profit, he does have greater profit potential,
        which is why he would purchase this option in the first place.

      • Avatar of shannondailyshannondaily
        Participant
          • Undecided
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          3
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          Woo! I got it right. 

        • Avatar of LeChiffreLeChiffre
          Participant
            • CFA Level 2
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            1
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            Look at this from Stephen’s perspective. He purchased the right to sell (strike) Sign Partners at $48 per share. He may not sell at a price > $48. The stock is currently trading at $50 and is trending upward. Stephen will not be able to exercise the option. He has already paid Jon $5, so it is most likely that Jon will not have to purchase the stock from Stephen and Jon will pocket the $5, making a profit.

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