CMA Study Group

 View Only
  • 1.  Derivatives-can someone pls explain the answer

    Posted 11-22-2019 03:03 AM
    Pitchgent Inc. stock was trading last month at $22 per share. There were two types of options available on the stock. Call options with a strike price of $16, which expire at the end of the month, were trading at $6.00. Put options with a strike price of $16, which expire at the end of the month, were trading at $1.10. Larry invested $132 in common stock. Keaty invested $132 in the call options. Marek invested $132 in the put options. At the end of one month, the price of Pitchgent Inc. is $25. How much money did Marek make from the investment?


    ------------------------------
    Syed Yousuf Jamal

    ------------------------------


  • 2.  RE: Derivatives-can someone pls explain the answer
    Best Answer

    Posted 11-23-2019 03:01 AM
    Marek invested in a put option. A put option gives the owner the right to sell the underlying asset. Here the strike price of the put option for the underlying asset at the time of purchase was 16 and the asset (stock) price was 22. At the end of period, the stock price increased to 25, which is greater than the strike price and if Marek wants to exercise the option, he would receive only the strike price, which is $16x22 shares= 352 instead of the current price $25x22 shares= 550. So Marek would let the option expire and lose the money invested in the option.

    ------------------------------
    Sunil Divakaran
    Accountant
    DUBAI
    United Arab Emirates
    ------------------------------



  • 3.  RE: Derivatives-can someone pls explain the answer

    Posted 11-23-2019 04:49 AM
    Thanks a lot bro

    ------------------------------
    Syed Yousuf Jamal
    None
    Alexandria
    Egypt
    ------------------------------



  • 4.  RE: Derivatives-can someone pls explain the answer

    Posted 11-23-2019 04:42 AM
    As Marek has invested $ 132 in the put options which is an option to sell, in which the strike price of $ 16 is less than the value of the underlying asset of $ 25, hence it would be out of the money and hence Marek loss is the amount invested of $ 132. Ravishankar

    ------------------------------
    RAVISHANKAR JAGANNATHAN
    Chief Financial Officer
    CHENNAI
    India
    ------------------------------



  • 5.  RE: Derivatives-can someone pls explain the answer

    Posted 11-25-2019 03:54 PM
    as Marek invested 132$ in put options we should  compare the strike price of the put option  with the market  price of stock on expiration date.
    because of strike price is  less than  market price on expiration date(16$<25$) so the put option will be out-of-the-money,and the option will not be exercised (Marek will not sell the stock at 16 when he can sell the same stock at 25 in the market on expiration date) so Marek will lose his  initial investment amount which equal to 132$

    ------------------------------
    Fadi Babbili
    Chief Financial Officer
    Beirut
    Lebanon
    ------------------------------



  • 6.  RE: Derivatives-can someone pls explain the answer

    Posted 11-26-2019 04:41 AM
    It is really important to know what's the question is asking about. "How much money did Marek make from the investment?". Although he lost the investment, which was a loss of $132, he didn't make anything. So the answer should be "0". The Put contract gave him the right to sell the common stock by $16, but he will just execute if the underlying was below this value. Because the underlying was at $25. He didn't anything.

    ------------------------------
    Victor Cavalcanti
    Student
    Rochester NY
    United States
    ------------------------------



  • 7.  RE: Derivatives-can someone pls explain the answer

    Posted 11-27-2019 02:31 AM
    6 X 25 = $150
    profit 132- 150=  $18

    ------------------------------
    Dileep Yeramaka
    Controller
    Chennai
    India
    ------------------------------