The spot price of the market index is $900.After 3 months the market index is priced at $915.The annual rate of interest on treasuries is 2.4% (0.2% per month).The premium on the long put,with an exercise price of $930,is $8.00.Calculate the profit or loss to the short put position if the final index price is $915.
A) $15.00 gain
B) $15.00 loss
C) $6.95 gain
D) $6.95 loss

Question

Quizplus · Accepted Answer

The profit or loss for the short put position can be calculated by considering the intrinsic value of the put option at expiration and the premium received. Since the final index price ($915) is below the exercise price ($930), the put option will be exercised, and the holder will sell the index for $930. The short position will have to buy the index at $930, incurring a loss of $15 ($930 - $915). However, the short position initially received a premium of $8.00. Therefore, the net loss is $15 - $8 = $7.00. Adjusting for the cost of carry due to the interest rate (0.2% per month for 3 months) on the premium received, the actual loss is slightly less. The exact adjustment for the interest on the premium is not directly provided, but since the choices suggest a specific value, and considering the interest effect, the closest option is a $6.95 loss.

The Spot Price of the Market Index Is $900