Auburn Co. has purchased Canadian dollar put options for speculative purposes.
ID: 2730802 • Letter: A
Question
Auburn Co. has purchased Canadian dollar put options for speculative purposes. Each option was purchased for a premium of $.02 per unit, with an exercise price of $.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.
Spot Price
Value of Put Option
$0.80
$0.82
$0.84
$0.86
$0.88
$0.90
$0.92
Spot Price
Value of Put Option
$0.80
$0.82
$0.84
$0.86
$0.88
$0.90
$0.92
Explanation / Answer
Spot Price strike price cost of option profit/loss $0.80 0.86 0.82 0.04 option would be exercised $0.82 0.86 $0.84 $0.02 option would be exercised $0.84 0.86 $0.86 $0.00 option would be exercised $0.86 0.86 $0.88 .02 only of premium paid option would not be exercised $0.88 0.86 $0.90 .02 only of premium paid option would not be exercised $0.90 0.86 $0.92 .02 only of premium paid option would not be exercised $0.92 0.86 $0.94 .02 only of premium paid option would not be exercised
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