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Question:

Jack Cheney, CFA, purchases a Swenson, Inc., October 80 put option for a premium of $5. Cheney holds the option until the expiration date when Swenson stock sells for $78 per share. At expiration, the loss on the contract is:

A $3.
Explaination

The intrinsic value of a put is the difference between strike price and stock price if stock price is less than strike price (80 - 78 = 2). The loss is equal to the intrinsic value minus the premium paid (2 - 5 =-3).