ST5 April 2015 - Question 7 - Strategy B

Just want to confirm for my own sanity...

I'm looking at this question in the past papers available on the Institute's website and can't understand how the solution in the examiner's report is arrived at.

I'm assuming that there is a typo or mistake in the question paper that the institute have published. Is that correct? There's no way a call at 5100 would be cheaper than a call at a higher strike price.

 

I can't understand how they arrive at a portfolio value of -£2 when the index is below 5100. Based on what is in the paper, it looks like none of the options would be exercised and the only cashflows would be the option premiums. 2 options are sold for a total of £9 and 2 options are bought for a total of £6. So I'm calculating that the portfolio value when the index is below 5100 is £3.

 

I wonder what happened to those who stated that in their answer...? Did they lose marks compared to those who just blindly went along with the information in the question? If so, how is this consistent with the actuaries code i.e. are actuaries supposed to unquestioningly go along with a bogus situation they've been presented with, or are we meant to point out the flaw and take it from there?

 

Is there anywhere that the IFOA acknowledge this error?
I spent 15 minutes doing the question (correctly to my knowledge and other actuaries in my office) and spent about an hour wondering why I can't match the Examiner's report. I actually thought it was simple enough, ignoring the silliness of the option premiums.
Surely they should recognise this error and update the examiner's report?

 

It's at moments like this we can observe how IFoA respond and make an assessment whether they are motivated by educational integrity or simply a desire to limit liability.