A Share Is Trading at $50

question 44

Multiple Choice

A share is trading at $50. You believe there is a 60% chance the price of the share will increase by 10% over the next three months. You believe there is a 30% chance the share will drop by 5% and you think there is only a 10% chance of a major drop in price of 20%. At-the-money 3-month puts are available at a cost of $650 per contract. What is the expected dollar profit for a writer of a naked put at the end of three months?

• A)$300
• B)$200
• C)$475
• D)$0

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Definitions:

Profit

The financial gain made in a transaction or operation, calculated as total revenues minus total costs.

Production Function

A mathematical relationship expressing the amount of output generated from different amounts of inputs.

Profit

The financial gain obtained when the revenue generated from business activities exceeds the expenses, costs, and taxes involved in sustaining the activity.

Commodity

A fundamental merchandise in commerce that can be swapped with other merchandise of a similar nature.