3 pointsMr. Ram buys 100 calls on a stock with a strike of Rs.1,200. He pays a premium of Rs.50/call. A month later the stock trades in the market at Rs.1,300. Upon exercise he will receive _________. Rs.10,000 Rs.1200 Rs.6000 Rs.115
Question
3 pointsMr. Ram buys 100 calls on a stock with a strike of Rs.1,200. He pays a premium of Rs.50/call. A month later the stock trades in the market at Rs.1,300. Upon exercise he will receive _________. Rs.10,000 Rs.1200 Rs.6000 Rs.115
Solution
The calculation for the profit Mr. Ram will receive upon exercise is as follows:
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First, we need to calculate the intrinsic value of the call option. This is done by subtracting the strike price from the market price of the stock. In this case, it would be Rs.1300 (market price) - Rs.1200 (strike price) = Rs.100.
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Next, we multiply this intrinsic value by the number of calls Mr. Ram bought. So, Rs.100 * 100 calls = Rs.10,000.
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However, we must also subtract the total premium that Mr. Ram paid for the calls. The premium per call was Rs.50, so for 100 calls, he paid Rs.50 * 100 = Rs.5000.
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Therefore, upon exercise, Mr. Ram will receive Rs.10,000 (from step 2) - Rs.5000 (from step 3) = Rs.5000.
So, the correct answer is not listed in the options provided. Mr. Ram will receive Rs.5000 upon exercise.
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