Question

Suppose a financial manager buys call options on 45.000 hands of oil with an exercise price of $31 per barrel. She simultaneously sells a put option on 45,000 hands of oil with the same exercise price of $31 per barrel. Her net profit per barrel is _____ if the price per barrel is $29 and _____ if the price per band is $35.

A. -$4;$2

B. -$2;$0

C. S0;-$2

D. -$2;$4

Answer 1

The net profit per barrel for the financial manager is a loss of $2 when the price per barrel is $29 and a profit of $4 when the price per barrel is $35. Therefore, the correct option is D.

Step-by-step explanation:

The financial manager's net profit per barrel when the price per barrel is $29 is calculated as follows: The call option will expire worthless since the price is below the exercise price, and thus it provides no financial gain. However, the financial manager has sold a put option, which means she is obligated to buy oil at $31 while the market price is $29, resulting in a loss of $2 per barrel. When the price per barrel is $35, the financial manager can exercise the call option to buy oil at $31, which she can then sell at the market price of $35, netting a profit of $4 per barrel. Conversely, the put option she sold will expire worthless to the buyer, incurring no cost to the financial manager.