Q 45 on CFA LIII Sample exam why, provided, question, highest

mfleming1983

Strategy 1- Protective put with option strike of $95
Strategy 2 Covered Call using an option with a strike of $105.00
Strategy 3 Bear Spread using put options with $90.00 and $100.00 strikes
The question also provided option prices
The question asked , if the Mountain Hawk stock declines to $88.00, which dericatives strategy will most likely give the highest value at expiration.
If anyone has done this question, the answer givn was C.
Please explain why in calculating the VALUE  AT EXPIRATION, we are taking account the option premiums.

pimpineasy

For a) are you saying since you own the stock - you are effectively paying only 7?
For b) you own the stock, sell a call - your final position is the stock you owned. Since Call is OTM - you pay 0 for the position?
For c) Value is 10.
And among the 3 - it is the biggest?
Jeff - what was the answer posted (correct answer description and reasoning)?

rkapoor

I don’t understand how it’s not C. The question asked:


The question asked , if the Mountain Hawk stock declines to $88.00, which dericatives strategy will most likely give the highest value at expiration.
In other words, How much would you pay for those positions at time of expiry?

A) 7 bucks

B) nothing

C) 10 bucks

kkn006

my cal
- Pro put:  (long stock and long put)
value (total strategy) = loss from long stock + profit from put
-covered call: short call + long stock
value = loss from stock (partly covered by premium)
- bear spread (put) = long put high + short put low
value = put high - put low = 100 -90 = 10
thats C ?
ah ohhhhhhhhh
sorry, they say value…..)
so pro Put has value of 95  )

bchadwick

is this one of the online tests? from testtrac?

MiniMe7

The question agve all the premiums for the options then asked for value at expiration. I was expalining to cp that value at expiration does not include any premiums and this question must have had some errata

neil1234

ya value at expiration is Vt
and pro put offers highest value, bear put offers least
with the info given in this post, profit cannot be calculated

Darien

yeah got it confused while writing it out.
did it as the put …
need to stop making these mistakes

comp_sci_kid

I thought it was the put, I beleive that the  $88 was the value at expiration so the value of the put was
88+(95-88) =95.
The value of the covered call would be
88+max(0,88-105)=88 and the value of the near is
Max(0,100-88)-max(0,90-88)=10
Let me know what you think

onelife1

thanks for pointing that out.
did you contact them about a possible erratum.
What was the explanation they provided?
I am getting the covered call to be the one with max value at expiration. Was that your choice too?