Consider a European put option on SFr 100,000 with an exercise price of $1.2/SFr. You pay an
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Question:
Consider a European put option on SFr 100,000 with an exercise price of $1.2/SFr. You pay an option premium of $0.15/SFr for the put option today.
a. If the $-SFr spot exchange rate is $1.02/SFr on the contract expiration date, would you exercise the put option (sell SFr at the exercise price at expiration)? What would be the option payoff and profit at expiration?
b. If the $-SFr spot exchange rate is $1.25/SFr on the contract expiration date, would you exercise the put option? What would be the option payoff and profit at expiration?
c. At what $-SFr spot exchange rate at expiration would you break-even (profit=0)?
Expert Answer:
To answer the questions we need to compare the spot exchange rate on the contract expiration date wi... View the full answer
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