A European put option contract with an exercise price of $1.75 per pound and a contract size of £32,500 is currently trading at a premium of $0.20 per pound.

Required:

a-1. If you buy this contract, what spot exchange rate at maturity will maximize your profit?

a-2. If you buy this contract, what is the amount of the maximum possible profit from one contract?

b. If you buy this contract, what is your maximum possible loss from one contract?

c. If you sell this contract, what is your maximum possible profit on this contract?

d-1. If you sell this contract, what is your maximum possible loss from one contract?

d-2. At what future spot exchange rate will you maximize your loss?

e. At what future spot exchange rate, will either the buyer or seller of this contract break even?

Answer rating: 100% (QA)

Here are the answers a1 The spot exchange rate at maturity that will maximize the ... View the full answer