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Answer: Short put < short forward < long forward
Compare the **maximum possible profit** of each position: - **Short put**: maximum profit is limited to the option premium received. - **Short forward**: maximum profit occurs if the underlying price falls to zero, giving a profit up to the current spot price. - **Long forward**: maximum profit is theoretically unlimited if the underlying price rises without bound. Thus the order from lowest to highest maximum profit is: **Short put < short forward < long forward** So the correct answer is **D**.
Author: Manit Arora
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136.4 Consider three positions on the same underlying asset: 1. Long forward (forward price at current spot price), 2. Short forward (forward price at current spot price), and 3. Short put option (strike price at current spot price). Which sequence, from lowest potential to highest, describes their MAXIMUM PROFIT potential?
A
Long forward < short forward < short put
B
Short forward < short put < long forward
C
Short put < long forward < short forward
D
Short put < short forward < long forward
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