Auburn Co. has purchased Canadian dollar put options for speculative purposes. E

Question

Auburn Co. has purchased Canadian dollar put options for speculative purposes. Each option was purchased for a premium of dollar .02 per unit, with an exercise price of dollar .86 per unit. Auburn Co. will purchase the Canadian dollars just before it exercises the options (if it is feasible to exercise the options). It plans to wait until the expiration date before deciding whether to exercise the options. In the following table, fill in the net profit (or loss) per unit to Auburn Co. based on the listed possible spot rates of the Canadian dollar on the expiration date. Draw the associated contingency graph.

Explanation / Answer

Spot Price Value of Put Option $      0.80 .86 -.02 - .80 $                       0.04 $      0.82 .86 - .02 - .82 $                       0.02 $      0.84 .86 - .02 - .84 $                       0.00 $      0.86 $                      -0.02 $      0.88 $                      -0.02 $      0.90 $                      -0.02 $      0.92 $                      -0.02 Always exercise the put option when the spot rate is less than exercise price.

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