Use the following information for questions 14-15 The current spot rate is $.40/

Question

Use the following information for questions 14-15 The current spot rate is $.40/SF. The 6-month forward rate is $.41/SF. A call option that expires in 6-months on 100,000 SF with a strike price of $.40/SF is selling for $1,900. A put option that expires in 6-months on 100,000 SF with a strike price of $.40/SF is selling for $100. Six months from now, the spot rate will be $.39/SF (this information is unknown right now, but I’m telling you).

14. If you entered into a contract to sell 100,000 SF in the forward contract, how much would you have made (lost)?

a. Lost $2,000

b. Lost $1,000

c. Made $1,000

d. Made $2,000

15. If you bought the put option, how much would you have made (or lost) including the original investment?

a. Lost $900

b. Lost $100

c. Made $900

d. Made $1,100

Explanation / Answer

14. If the contract was made to sell 100,000 SF in the forward contrat, the amount made (lost)=

c. made $1,000

   Note :

6 month Forward rate= $0.41

Put Option = $ 0.40.

Thus profit = (Forward rate- put option rate) * (number of SF in the contract)

                = $ (0.41-0.40)* (100000)

                = $ 1000

15. If Put option was bought, the amount made (lost) including the original investment=

a. Lost $ 900

Note : Loss = (Option Rate- Actual Spot rate) * (number of SF in the contract) - option premium

                   = $(0.40-0.39) *(100000) - 100

                  = Loss $900

Related Questions

Navigate

• Browse (All)
• Browse U
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.