Assume that the exercise price is $1.40/£ and the put premium is $0.10/£. Answer
ID: 2754145 • Letter: A
Question
Assume that the exercise price is $1.40/£ and the put premium is $0.10/£. Answer the following questions. [Hint: Please answer the following questions in term of the holder (Purchaser) of a put option]
What are the future spot rates for “in the money” and “out of the money”?
What is the spot rate for the breakeven point (zero net profit) for this option?
Find the net profit (per unit of currency) for the buyer of this put option when the spot rates are $1.25/£, $1.35/£, $1.45/£, and $1.55/£.
Spot Rate
What would be the maximum possible loss for a buyer of this put option (per unit) and explain why?
Spot Rate
Net Profit (Loss) per unit if Spot Rate Occurs $1.25/£ $1.35/£ $1.45/£ $1.55/£Explanation / Answer
Spot Rate
The holder of put option will not sell unless he is making a profit and hence he will not exercise option in first 2 cases wherein he will lose the premium of 0.10
In next 2 cases he will exercise the option and result in ultimate gain
Spot Rate
Net Profit (Loss) per unit if Spot Rate Occurs $1.25/£ -0.10 $1.35/£ -0.10 $1.45/£ -0.05 $1.55/£ +0.05Related Questions
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