Question of the Week

An investor has bought 25 call options on oil. The exercise price of the call is $29.45 per barrel and each call represents 250 barrels. If the premium was $1.23 per barrel, and the price of oil closes at $28.75 at expiration, what will be the net profit or loss to the investor?

a) A loss of $7,687.50
b) A loss of $4,375.00
c) A gain of $4,375.00
d) A loss of $3,312.50

Answer:

The correct answer is: a)

Rule for a long call position:

If at expiry, the asset price settles below the expiry price, Do Not Exercise.

Therefore, the loss = premium.

Premium = ($1.23/barrel)*(250 barrels per contract)*(25 call contracts) = $7,687.50

2006 CFA Level 1 LOS: 16.74.a