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Options Solutions

The document discusses factors affecting option premiums and provides examples of calculating profits and losses for call and put options on foreign currencies. It gives solutions to practice problems involving determining profits and losses based on option premiums, strike prices, and spot rates at exercise for options on British pounds and Canadian dollars.

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Md Al Alif Hossain 2121155630
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12 views

Options Solutions

The document discusses factors affecting option premiums and provides examples of calculating profits and losses for call and put options on foreign currencies. It gives solutions to practice problems involving determining profits and losses based on option premiums, strike prices, and spot rates at exercise for options on British pounds and Canadian dollars.

Uploaded by

Md Al Alif Hossain 2121155630
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Factors affecting option premium

CALL option premium


PUT option premium
10. Randy Rudecki purchased a call option on British pounds
for $.02 per unit. The strike price was $1.45, and
the spot rate at the time the option was exercised was
$1.46. Assume there are 31,250 units in a British
pound option. What was Randy’s net profit on
this option?

Solution:
Call option: the right to buy the FX (GBP) at $1.45
A call is exercised when the spot rate (at expiration) is greater than the strike price.
Per unit profit:
($1.46 – $1.45) - $.02 = -$.01 = per unit net profit
Total profit :
31,250*(-.01) = -$312.5

11. Alice Duever purchased a put option on British pounds


for $.04 per unit. The strike price was $1.80, and
the spot rate at the time the pound option was exercised
was $1.59. Assume there are 31,250 units in
a British pound option. What was Alice’s net profit
on the option?

Solution:
Put option: the right to sell the FX (GBP) at $1.80
A put option is exercised when the spot rate drops below the strike price
S<X
Per unit profit:
($1.80 – $1.59) – P = $.21 - $.04 = $.17
Total profit :
31,250*($.17) = $ 5,312.5
12. Mike Suerth sold a
call option on Canadian dollars for $.01 per unit.
The strike price was $.76, and the spot rate at the
time the option was exercised was $.82. Assume
Mike did not obtain Canadian dollars until the
option was exercised. Also assume that there are
50,000 units in a Canadian dollar option. What
was Mike’s net profit on the call option?

Solution:
Mike is the seller of the CALL option.
P = $.01; 𝑆𝑇 = $.82; X = $.76
Net profit (per unit) to the seller of the call option
= P – (𝑆𝑇 − 𝑋) = $.01 – ($.82 - $.76) = -$.05
Total Net profit = 50,000*(-$.05) = -$2500

13. Brian Tull sold a put


option on Canadian dollars for $.03 per unit. The
strike price was $.75, and the spot rate at the time
the option was exercised was $.72. Assume Brian
immediately sold off the Canadian dollars received
when the option was exercised. Also assume that
there are 50,000 units in a Canadian dollar option.
What was Brian’s net profit on the put option?
Solution:
Mike is the seller of the PUT option.
P = $.03; 𝑆𝑇 = $.72; X = $.75
Net profit (per unit) to the seller of the PUT option
= P – (𝑋 − 𝑆𝑇 ) = $.03 – ($.75 - $.72) = $.03 -$.03 = $0.00
Total Net profit = 0.00*50,000 = $0.00
Brian is breaking even.
19. LSU Corp. purchased Canadian dollar call options for speculative purposes. If these
options are exercised, LSU will immediately sell the Canadian dollars in the spot market.
Each option was purchased for a premium of $.03 per unit, with an exercise price of $.75.
LSU plans to wait until the expiration date before deciding whether to exercise the options.
Of course, LSU will exercise the options at that time only if it is feasible to do so. In the
following table, fill in the net profit (or loss) per unit to LSU Corp. based on the listed
possible spot rates of the Canadian dollar on the expiration date.

Solution:

Call option Is exercise when 𝑺𝑻> X


𝑺𝑻 Net profit or loss to the Buyer of the CALL option
possible Decision
spot rate at
expiration P = $.03; X = $.75
$.76 YES Net profit = (𝑺𝑻 − 𝑿) – P = ($.76 - $.75) - $.03 = -$.02
Net profit = (𝑺𝑻 − 𝑿) – P = ($.78 - $.75) - $.03 = -$.0.00; .78 is the
.78 YES Break-even Spot rate at expiration.
.80 YES Net profit = (𝑺𝑻 − 𝑿) – P = ($.80 - $.75) - $.03 = $.02
.82 YES Net profit = (𝑺𝑻 − 𝑿) – P = ($.82 - $.75) - $.03 = $.04
.85 YES Net profit = (𝑺𝑻 − 𝑿) – P = ($.85 - $.75) - $.03 = $.07
.87 YES Net profit = (𝑺𝑻 − 𝑿) – P = ($.87 - $.75) - $.03 = $.09

.80 .82 .85


20. Auburn Co.
has purchased Canadian dollar put options for speculative
purposes. Each option was purchased for a
premium of $.02 per unit, with an exercise price of
$.86 per unit. Auburn Co. will purchase the Canadian
dollars just before it exercises the options (if it
is feasible to exercise the options). It plans to wait
until the expiration date before deciding whether
to exercise the options. In the following table, fill in
the net profit (or loss) per unit to Auburn Co. based
on the listed possible spot rates of the Canadian
dollar on the expiration date.
PUT option is exercise when 𝑺𝑻 < X

𝑺𝑻 Net profit or loss to the Buyer of the PUT option


possible Decision
spot rate at
expiration P = $.02; X = $.86
$.76 YES Net Profit = (𝑿 − 𝑺𝑻 ) – P = ($.86 - $.76) - $.02 = $.08
.79 YES Net Profit = (𝑿 − 𝑺𝑻 ) – P = ($.86 - $.79) - $.02 = $.05
Net Profit = (𝑿 − 𝑺𝑻 ) – P = ($.86 - $.84) - $.02 = $0.00; .84 is the Break-
.84 YES even Spot rate at expiration.
.87 NO Net profit = -$.02
.89 NO Net profit = -$.02
.91 NO Net profit = -$.02

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