Question

You form a collar by buying a put with an exercise price of X1 = $43 and a premium of P = $6, and selling a call with an exercise price of X2 = $85 and a premium of C = $3. Both options mature in 6 months, and both have the same underlying asset. In addition, you buy the underlying asset for its current spot price of S = $63. Find the profit of this collar at expiration if the ending price of the underlying asset is ST = $60. Do NOT use the $ symbol in your answer; just write a numerical value. Of course, include the negative sign if the answer is negative; but do not include the positive sign if the answer is positive.

Answer 1

Answer:

Total profit of collar = -$22

Explanation:

Payoff of a short call option = P - Max[0, S-X]

Payoff of a long put option = Max[X-S, 0] - P

S = underlying price at expiry,

X = strike price

P = premium paid or received (long options involve paying premium, and short options receive premium)

Payoff of short call option = $3- Max[0, $60 - $85]

Payoff of short call option = $4 - (- $25)

Payoff of short call option = $29

Payoff of long put option = Max[$43 - 60, 0] - $5

Payoff of long put option = -$17 - $5

Total profit of collar = -$22