Q:
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
A:

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


RELATED FAQS

  1. A person whose registration has been revoked by an Administrator due to a felony ...

    The correct answer is a. The Administrator may suspend, deny or revoke registration in any capacity if the person has such ...
  2. Which of the following, under the NASD Conduct Rules, would constitute a complaint ...

    The correct answer is b. The NASD defines a “complaint” as adverse communications that are in writing. Choices I and III ...
  3. Under the Investment Company Act of 1940, which of the following is not a formal ...

    The correct answer is d. A mutual fund is technically registered under the ’40 Act as an open-end management investment company. ...
  4. When a floor broker asks a specialist, “How’s PDQ?” ...

    The correct answer is d) When the specialist gave the floor broker the quote of “59.20 to 35; 6 by 11,”  the quote meant ...
RELATED TERMS
  1. No results found.
Hot Definitions
  1. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  2. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  3. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  4. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  5. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
Trading Center