Question

You sold an option whose MTM profits look like the picture below. What is the premium per unit that you charged your client? If the answer is A,BC, or D, simply type the respective letter in the answer box. If the answer is E, write down the correct answer and the unit of measurement. 240,000.00 172,452.00 -175,512.00 - - - - - - - - - - -- 1 --- 56.621440 58.361260 A. 3.0 USD/unit B. 2.5 USD/unit C.2.0 USD/unit D. There is not enough information to answer the question E. None of the above

Answer 1

The right answer is $1.25 per unit. Let's see the calculations.

The total option price is $250,000 as is clear from the graph above (the horizontal straight line when the option is out of money).

We need to know how many options were sold for this price.

Pls note that the payoff is changing from $172452 to -$175512 when the price of the underlying security changes from 56.62144 to 58.361260. The total change in payoff is $172452-(-$175512) = $347,964 and the change in the underlying security price is 58.361260-56.62144 = 1.73982. Hence the number of units involved are $347964/1.73982 = 200000

So the price of option per unit = 250000 / 200000= 1.25