P1.T3 Products-option strategy 12.11.6

[FRMCAND]

Hi David/Suzanne,
regarding question 12.11.6 pag.133 - option stategy, with given data
Kput=40
Kput=49
Kput=49
S=34
cash outflows=(1)
I don’t get the same profit as in your answer. It seems that Kput used to calculate net profit in the answer is different from data provided in the question. Could you check it please ? or I’m wrong in my calculation.
Thank you very much.
Regards,
Olga

 

[David Harper CFA FRM]

Hi FRMCAND

You are correct, it's our mistake, apologies. As written, the answer appears to be $17 .... but we made a mistake: the second bought put should read "buying one put where K(put) = 36" (otherwise, if 49, there is a flaw that both bought puts with same strike at $49 would have such different prices). So, as written (incorrectly), I get $17

but the question needs to be corrected to ask:

• buy p = $8, K =49
• sell 2 p = $5, K = 40
• buy p = 3, K = 36
  
  for initial cost of -8 + 2*5 - 3 = -1

So if future S(k) = 34, Then:

• max[0, 49-34] - max[0,40-34]*2 + max[0,36-34] = 15 - 2*6 + 2 = +5 payoff. And profit = 5 - 1 = 4.0

That was the intent, i think, sorry for the mistake, I have submitted for a correction, thank you for your attention to detail!