Consider a call and a put option on the Australian dollar. The call gives the tr

Question

Consider a call and a put option on the Australian dollar. The call gives the trader a right to buy AUDI million at an exercise exchange rate of 0.60 (USD/AUD), while the put gives the right to sell AUDI million at the same exchange exercise rate. Suppose the trader pays USDO.02 and USDO.03 (per unit of the Australian dollar) to acquire the call and the put respectively. 16. On expiration date, if the spot exchange rate happens to be 0.65, then the trader of the call option will make A a net profit of USD50,000 B: a net profit of USD30,000. C: a net profit of USD40,000. D: a net profit of USD10,000. E: a net profit of USD20,000. If the spot exchange rate on expiration date happens to be 0.65, then the trader of the put option will have A: a net loss of USD30,000. B: a net loss of USD70,000. C: a net loss of USD60,000. D: a net profit of USD30,000. 17. E: a net profit of USD20,000. 18: If the spot exchange rate on expiration date is 0.55, then A: B: C: D: E. the gross profit on the long put will be equal to USD50,000. the net profit on the long put will be equal to USD20,000. the net loss on the short put will be equal to USD30,000. all of the above will be true. A and B will be correct. 19. If a forecast indicates that the spot exchange rate will be higher than the forward rate on the maturity date of the forward contract: A) a speculator will buy forward and sell spot upon delivery. B) a speculator will sell forward and sell spot upon delivery C) a speculator will buy forward and buy spot upon delivery. D) a speculator will sell forward and buy spot upon delivery. 20. If a forecast indicates that the spot exchange rate will be lower than the forward rate on the maturity date of the forward contract: A) a speculator will buy forward and sell spot upon delivery. B) a speculator will sell forward and sell spot upon delivery. C) a speculator will buy forward and buy spot upon delivery. D) a speculator will sell forward and buy spot upon delivery.

Explanation / Answer

16) As the strike rate is less than the spot rate the holder of the call option will exercise the option to buy AUD 1 million at 0.60USD and sell it at 0.65uSD in the spot market. His gain after setting off the premium will be: =1000000*(0.65-0.60)-1000000*0.02 = $        30,000 Answer: Option [B]. 17) As the strike rate is less than the spot rate the holder of the put option will not exercise option; his loss being limited to the premium paid. = 1000000*(0.03) = $        30,000 Answer: Option [A]. 18) Answer: Option [D] All of the above will be true. 19) Option [A] He can make profit as the purchase rate (forward rate) will be lower than the selling rate (spot rate on maturity). 20) Option [D] Profit can be made as the selling rate (forward rate) will be higher than the purhase rate (spot on maturity).

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