I have a confusion with the solution of the last question of sample 2 on options. HMM Foundation owns 30,000 shares of Nasdaq 100 Index Tracking Stock (Symbol: QQQQ), which has a current price of $30 per share. Osborne believes that there is substantial risk of downside price movement in the index over the next six months. She recommends that HMM use a six-month collar for the entire position of 30,000 shares as protection against the QQQQ price falling below 27. Exhibit 1 gives exercise prices and option premiums (per share) for QQQQ puts and calls expiring in 6 months. ----------------------------------------------------------------- Exhibit 1 QQQQ Puts and Calls Expiring in Six Months Option Type Exercise Price () Option Premium ($) Call 35 0.80 Put 27 0.95 -------------------------------------------------------------------- The QQQQ Index option contract is for 100 shares of the index tracking stock. HMM would hold the collar strategy until expiration of the put and call options. If the HHM Foundation enters into the collar recommended by Osborne and the market value of QQQQ is $33 at the expiration date of the options, the profit from the position would be closest to: A. 85,500 B. 90,000 C. 94,500 CFAI is taking the number of contracts to be same as the number of shares (30,000) as it is multiplying 30,000 with the option price. Shouldn’t the number of contracts be 300 (30,000/100) and 300 should be multiplied with the difference in option price? The answer comes out to be 89,955, close to 90,000. The same error has been made in the next question. Please post your responses and views.
sorry dude but the answer is correct P/L from the stock+option cost= ($33-$30)*30,0000+(0.80-0.95)*30,000=$85,500 i used to have the same confusion in there (# contract v # options) but it doesn’t really make a difference in the end if you know how many options you have in hand
agree answer should be A 30000*.80 + 30000*3 - 30000*.95
itstoohot Wrote: ------------------------------------------------------- > sorry dude but the answer is correct > > P/L from the stock+option cost= > ($33-$30)*30,0000+(0.80-0.95)*30,000=$85,500 > > i used to have the same confusion in there (# > contract v # options) but it doesn’t really make a > difference in the end if you know how many options > you have in hand second that , the answer for this question is correct. I still don’t about the yield beta thing.
I have sent an email to cfai regarding that. I think as itstoohot has pointed out there is problem with the number of oprtions and number of contracts, in this case then the number of options per contract should be 300. This is really confusing, but, if the answer is correct, then the rule of thumb should be to take the total number of stocks itself. Thanks for your responses, I will post the response from cfai.