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7 September, 15:37

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.

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  1. 7 September, 15:51
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    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
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