On 1 July, ALPS Company shares trade at 2,000. An investor enters the following option: (3-month maturity): Option Type Strike (₹) Premium (₹) A…

CA Final · Advanced Financial Management · PYQS · May 2026
On 1 July, ALPS Company shares trade at 2,000. An investor enters the following option: (3-month maturity): Option Type Strike (₹) Premium (₹) A Call 1920 130 B Call 2000 85 C Call 2080 45 D Put 1920 40 E Put 2000 95 F Put 2080 155 Contract size = 100 shares. Risk-free rate = 6% p.a. (continuous compounding not required) and the stock does not pay dividends. Ignore transaction costs. Assume that investor chosen any one option. Required: (i) Assess the ITM, ATM, OTM of each option A to option F at initiation and evaluate the intrinsic and time value components embedded in the premiums. (ii) In the next 3 months expiry price may increase by 150 or may decrease 150. Under each expiry scenario, examine which options will be rationally exercised and appraise the net profit or loss per contract.

Suggested Answer and Working Notes:

(a) (i) Intrinsic and Time Value Option Type Strike Price (₹) Spot Price (₹) Status Premium (₹) IV (₹) TV (₹) A Call 1,920 2,000 ITM 130 80 50 B Call 2,000 2,000 ATM 85 - 85 C Call 2,080 2,000 OTM 45 - 45 D Put 1,920 2,000 OTM 40 - 40 E Put 2,000 2,000 ATM 95 - 95 F Put 2,080 2,000 ITM 155 80 75 (ii) Position of Net Profit/ Loss under different scenario (A) Price increase by - 150 Option Expected Price (₹) Status Profit (₹) Premium (₹) Net Profit/ Loss Per Share (₹) Lot Size Total Profit/ Loss (₹) A 2,150 Exercise 230 130 100 100 10,000 B 2,150 Exercise 150 85 65 100 6,500 C 2,150 Exercise 70 45 25 100 2,500 D 2,150 Decline - 40 - 40 100 - 4,000 E 2,150 Decline - 95 - 95 100 - 9,500 F 2,150 Decline - 155 - 155 100 - 15,500 (B) Price decrease by - 150 Option Expected Price (₹) Status Profit (₹) Premium (₹) Net Profit/ Loss Per Share (₹) Lot Size Total Profit/ Loss (₹) A 1,850 Decline - 130 - 130 100 - 13,000 B 1,850 Decline - 85 - 85 100 - 8,500 C 1,850 Decline - 45 - 45 100 - 4,500 D 1,850 Exercise 70 40 30 100 3,000 E 1,850 Exercise 150 95 55 100 5,500 F 1,850 Exercise 230 155 75 100 7,500

Topics: Derivatives Analysis & Valuation

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