 # Q 45 on CFA LIII Sample exam

Strategy 1- Protective put with option strike of \$95

Strategy 2 Covered Call using an option with a strike of \$105.00

Strategy 3 Bear Spread using put options with \$90.00 and \$100.00 strikes

The question also provided option prices

The question asked , if the Mountain Hawk stock declines to \$88.00, which dericatives strategy will most likely give the highest value at expiration.

If anyone has done this question, the answer givn was C.

Please explain why in calculating the VALUE AT EXPIRATION, we are taking account the option premiums.

Value at expiration = Profit.

CP

When and where does value at expiration =profit

Value at expiration is the value of the position at expiration.

Profit subtracts ay premiusm paid etc from the value at expiration.

This is clear in the CFA notation where VT is defined as value at expiration and pi is defined as profit

thanks for pointing that out.

did you contact them about a possible erratum.

What was the explanation they provided?

I am getting the covered call to be the one with max value at expiration. Was that your choice too?

I thought it was the put, I beleive that the \$88 was the value at expiration so the value of the put was

88+(95-88) =95.

The value of the covered call would be

88+max(0,88-105)=88 and the value of the near is

Max(0,100-88)-max(0,90-88)=10

Let me know what you think

yeah got it confused while writing it out.

did it as the put …

need to stop making these mistakes

ya value at expiration is Vt

and pro put offers highest value, bear put offers least

with the info given in this post, profit cannot be calculated

The question agve all the premiums for the options then asked for value at expiration. I was expalining to cp that value at expiration does not include any premiums and this question must have had some errata

is this one of the online tests? from testtrac?

my cal

• Pro put: (long stock and long put)

value (total strategy) = loss from long stock + profit from put <= (95-88) = 7

-covered call: short call + long stock

value = loss from stock (partly covered by premium)

• bear spread (put) = long put high + short put low

value = put high - put low = 100 -90 = 10

thats C ?

ah ohhhhhhhhh

sorry, they say value…:))

so pro Put has value of 95 :))

I don’t understand how it’s not C. The question asked:

The question asked , if the Mountain Hawk stock declines to \$88.00, which dericatives strategy will most likely give the highest value at expiration.

In other words, How much would you pay for those positions at time of expiry? A) 7 bucks B) nothing C) 10 bucks

For a) are you saying since you own the stock - you are effectively paying only 7?

For b) you own the stock, sell a call - your final position is the stock you owned. Since Call is OTM - you pay 0 for the position?

For c) Value is 10.

And among the 3 - it is the biggest?

Jeff - what was the answer posted (correct answer description and reasoning)?