The premium on a call option on the market index with an exercise price of 1050 is $9.30 when originally purchased.After 2 months the position is closed,and the index spot price is 1072.If interest rates are 0.5% per month,what is the Call Profit?
A) $9.30
B) $9.39
C) $12.61
D) $22.00

Question

Quizplus · Accepted Answer

To find the call profit, we need to calculate the profit from exercising the option and subtract the premium paid.

To exercise the option, we need to compare the index spot price at the end of 2 months to the exercise price. Since the spot price is higher than the exercise price, we can exercise the option and buy the index at 1050, then sell it at 1072, making a profit of 1072-1050 = 22.

However, we also need to take into account the time value of money, since interest rates are 0.5% per month. Using the formula for the present value of a cash flow, we can find that the present value of the profit from exercising the option is:

22/(1+0.005)^2 = 21.76

Therefore, the call profit is:

21.76 - 9.30 = 12.46

Rounding to the nearest cent, the answer is C) $12.61.

The Premium on a Call Option on the Market Index