Question

Suppose the current price of a stock is $80, the 1-year interest rate is 2%, and the forward price is $81.60. The premiums for options on the stock with a 1-year expiry along with the strike are listed below. Calculate the maximum loss (in terms of profit) on a floor with strike $76.

Round your answer to the nearest one-hundredth, do not use dollar signs.

Strike	Call Premium	Put Premium
76	4.72	0.80
78	3.16	1.96
82	1.23	3.19
84	0.75	4.67
86	0.64	6.52

Answer 1

Answer>

Floor Strategy - Buying a call option and buying a put option of same strike price.

Here the floor is made of options of strike price 76.

Call premium = 4.72

Put premium = 0.80

Maximum loss possible in Call option = premium price = 4.72

Maximum loss possible in Put option = premium price = 0.8

Both call and put becomes 0 at expiry price of 76

Hence maximum loss at expiry price of 76

Value of maximum loss in (terms of profit) = -4.72 + -0.8 = -5.52

Hence the answer is -5.52