UPF – Financial Risk Management Finals, 2026 – Study Material and
Practice Questions
Call - ANS✔✔ gives the holder the right to buy, think the market will be bullish in the future
Put - ANS✔✔ gives the holder the right to sell, think the market will be bearish in the future
Long Call - ANS✔✔ -Buyer of a call option has the right to buy an underlying asset
-St < X, Profits = -c
-St = X, Profits = -c
-St > X, Profits = St -X- c
Short Call - ANS✔✔ -obligation to sell the stock at the strike price. In return for this obligation,
they receive the premium
-St < X, Profits = +c
-St = X, Profits = +c
-St > X, Profits = -St+X+c
Long Put - ANS✔✔ -Buyer of a put option, has the right to sell the underlying asset
-St < X, Profits = X -St- P
-St = X, Profits = -P
-St > X, Profits = -P
Short Put - ANS✔✔ -The writer (seller) of a put option, has the obligation to buy the underlying
asset
-St < X, Profits = -X + St + P
-St = X, Profits = +P
, -St > X, Profits = +P
Protective Put - ANS✔✔ -a risk-management strategy using options contracts that investors
employ to guard against the loss of owning a stock or asset (protects against a bear market)
-long asset & long put
-buy (long) and pay a premium
-St < X, lose money, should exercise your out option, 𝜋 = St-So+X - St - P
-St = X, don't exercise and only lose premium,
𝜋 = ST - So - P or X- So - P because ST = X
-St > X, don't exercise, happy it went up, only lose the premium,
𝜋 = ST - So - P
zero-cost collar - ANS✔✔ -a free insurance where you buy put options with the money collected
from selling call options.
-long asset & long put and short call
-At expiration dates, the zero cost collar becomes a long asset
-St < Xp < Xc (bear market),
𝜋 = St - So + Xp - St - p + C = -So + Xp
-Xp < St < Xc,
No exercise for put or call,
𝜋 =St - So
You get -p + c they cancel out
-Xp < Xc < St (bull market), no exercise for put but will for call
𝜋 = -So + Xc
Covered Call: Strategy and profit scenarios - ANS✔✔ A position often taken by insurance
companies to protect themselves from unlimited losses when they sell a call option.
Practice Questions
Call - ANS✔✔ gives the holder the right to buy, think the market will be bullish in the future
Put - ANS✔✔ gives the holder the right to sell, think the market will be bearish in the future
Long Call - ANS✔✔ -Buyer of a call option has the right to buy an underlying asset
-St < X, Profits = -c
-St = X, Profits = -c
-St > X, Profits = St -X- c
Short Call - ANS✔✔ -obligation to sell the stock at the strike price. In return for this obligation,
they receive the premium
-St < X, Profits = +c
-St = X, Profits = +c
-St > X, Profits = -St+X+c
Long Put - ANS✔✔ -Buyer of a put option, has the right to sell the underlying asset
-St < X, Profits = X -St- P
-St = X, Profits = -P
-St > X, Profits = -P
Short Put - ANS✔✔ -The writer (seller) of a put option, has the obligation to buy the underlying
asset
-St < X, Profits = -X + St + P
-St = X, Profits = +P
, -St > X, Profits = +P
Protective Put - ANS✔✔ -a risk-management strategy using options contracts that investors
employ to guard against the loss of owning a stock or asset (protects against a bear market)
-long asset & long put
-buy (long) and pay a premium
-St < X, lose money, should exercise your out option, 𝜋 = St-So+X - St - P
-St = X, don't exercise and only lose premium,
𝜋 = ST - So - P or X- So - P because ST = X
-St > X, don't exercise, happy it went up, only lose the premium,
𝜋 = ST - So - P
zero-cost collar - ANS✔✔ -a free insurance where you buy put options with the money collected
from selling call options.
-long asset & long put and short call
-At expiration dates, the zero cost collar becomes a long asset
-St < Xp < Xc (bear market),
𝜋 = St - So + Xp - St - p + C = -So + Xp
-Xp < St < Xc,
No exercise for put or call,
𝜋 =St - So
You get -p + c they cancel out
-Xp < Xc < St (bull market), no exercise for put but will for call
𝜋 = -So + Xc
Covered Call: Strategy and profit scenarios - ANS✔✔ A position often taken by insurance
companies to protect themselves from unlimited losses when they sell a call option.
