# CMA Study Group

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## Derivatives-can someone pls explain the answer

• #### 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?
 \$0 Marek lost the investment amount of \$132 \$948 \$3,000

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Syed Yousuf Jamal

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• #### 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.

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Sunil Divakaran
Accountant
DUBAI
United Arab Emirates
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• #### 3.  RE: Derivatives-can someone pls explain the answer

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

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Syed Yousuf Jamal
None
Alexandria
Egypt
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• #### 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

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RAVISHANKAR JAGANNATHAN
Chief Financial Officer
CHENNAI
India
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• #### 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\$

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Chief Financial Officer
Beirut
Lebanon
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• #### 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.

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Victor Cavalcanti
Student
Rochester NY
United States
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• #### 7.  RE: Derivatives-can someone pls explain the answer

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

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Dileep Yeramaka
Controller
Chennai
India
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