IFoA SP6 Practice Questions - IFoA SP6 Financial Derivatives Specialist Principles Exam

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An investor holds a European call option with strike 100. At expiry the underlying is worth 92. What is the payoff and what has happened to the premium paid?

Payoff 8; premium recovered Payoff -8; investor must pay the difference Payoff 0; the premium paid is a sunk loss Payoff 100; the option is exercised at strike

Correct Answer:

Payoff 0; the premium paid is a sunk loss

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