Assume that the exercise price is $1.40/ and the put premium is $0.10/. Answer the following questions.
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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]
1. (5 points) What are the future spot rates for "in the money" and "out of the money"?
2. (5 points) What is the spot rate for the breakeven point (zero net profit) for this option?
3. (8 points) 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 | Net Profit (Loss) per unit if Spot Rate Occurs |
| $1.25/ | |
| $1.35/ | |
| $1.45/ | |
| $1.55/ |
4. (2 points) What would be the maximum possible loss for a buyer of this put option (per unit) and explain why?
Expert Answer:
1 The future spot rates for in the money and out of the money can be determined based on the relationship between the exercise price and the spot rate ... View the full answer
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