One year ago, you bought a put option on 200,000 euros with an expiration date o
ID: 2735675 • Letter: O
Question
One year ago, you bought a put option on 200,000 euros with an expiration date of one year. You paid a premium on the put option of $.04 per unit. The exercise price was $1.31. Assume that one year ago, the spot rate of the euro was $1.29, the one-year forward rate exhibited a discount of 2%, and the one-year futures price was the same as the one-year forward rate. From one year ago to today, the euro depreciated against the dollar by 3 percent. Today the put option will be exercised (if it is feasible for the buyer to do so). a. Determine the total dollar amount of your profit or loss from your position in the put option. b. Now assume that instead of taking a position in the put option one year ago, you sold a futures contract on 200,000 euros with a settlement date of one year. Determine the total dollar amount of your profit or loss.
Explanation / Answer
Answer:-
(A)
The spot rate depreciated from $1.29 to $1.251. The loss on the put option per unit is$1.251– $1.29 + $.04 = –$.001. Total loss = $.001 × 200,000 = $200
(B)
The forward rate one year ago was equal to: $1.29 × (1 – .02) = $1.264. So the futures rate is $1.264. The gain per unit is $1.264 – $1.251= $.013 and the total gain is $.013× 200,000= $2,600.
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