Question

George Soros and Warren Buffet both believe the stock market is going down (i.e. stock prices will fall). Soros decides to use an option strategy and Buffet decides to use a forwards strategy. Currently, the stock market is priced at $200. A call option has a strike of $205 and costs $2. A put option has a strike of $195 and costs $3. The forward price is $201. Each investor uses the respective derivative strategy mentioned above. What is the profit/loss of each investor if the market finishes at $198?

Multiple Choice:

Soros breaks even Buffet profits $1

Soros profits $3 Buffet loses $2

Soros loses $3 Buffet profits $3

Soros profits $2 Buffet profits $3

Soros loses $2 Buffet profits $1

Answer 1

Soros used an option strategy and he anticipated that the market will go down, so either he will sell call option or buy put option:
sell call option- profit = $2
Buy put option- profit = -$3

Buffet used forward strategy and he anticipated that the market will go down, so either he will sell the forward.
Profit = $201-$198=$3.

Therefore answers can be:
Soros loses $3 Buffet profits $3
Soros profits $2 Buffet profits $3

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