Please provide solution of following problem- The market received rumour about PRUDENTIAL PHARMA LTD'S tie up with a multinational company. This has induced the market price to move up. If the rumour is false, Prudential Pharma Ltd.,s stoct price will probably fall dramatically. To protect from this MS. KRITIKA, an investor has bought the call and put options. She purchased a 3-month call option for 100 Stocks in Prudential Pharma Ltd. at a premium of Rs.12 per stock with an exercise price of Rs. 250. She also purchased a 3-month put option for 100 stocks of the said company at a premium of Rs. 6 per stock with an exercise price of Rs. 210. Required: (i) Determine the Investor's (Kritika) position if the tie up offer bids the price of prudenrial pharma Ltd,s Stock up to Rs.260 in 3 months. (ii) Determine the Investor's (Kdtika) position if the tie up programme fails and the price of stock falls to Rs. 215 in 3 month.
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Option value
Replies (1)
Total premium paid in this case is (Rs. 12+6) * 100 = Rs. 1800
(i) - If stock closes at Rs. 260 - Put option is worthless and Call option will be exercised making a profit of (260 - 250 = 10) * 100 = Rs. 1,000. If we deduct premium - net loss = Rs. 800
(ii) - If stock closes at Rs. 215 then Put as well as Call are worthless. Total loss = Premium paid.
Prabhat Mittal
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