In: Finance
Sallie Schnudel trades currencies for Keystone Funds in Jakarta. She focuses nearly all of her time and attention on the U.S. dollar/Singapore dollar ($/S$) cross-rate. The current spot rate is $0.6000/S$. After considerable study, she has concluded that the Singapore dollar will appreciate versus the U.S. dollar in the coming 90 days, probably to about $0.7000/S$. She has the following options on the Singapore dollar to choose from:
Option Strike Price Premium
Put on Sing $ $0.6500/S$ $0.00003/S$
Call on Sing $ $0.6500/S$ $0.00046/S$
a. 0.0495 b. 0.04997 c. 0.05003 d. -0.05046 e. -0.00003 f. -0.00046 g. +0.00003 h. -0.0495
a. 0.04954 b. 0.04997 c. 0.05003 d. -0.05046 e. -0.00003 f. -0.00046 g. +0.00003 h. -0.04954
Buyer of put option :
If price on expiry is less than strike price, put will be exercised,otherwise not.
If put is exercised, payoff = strike price - price on expiry otherwise, payoff = 0
Profit = payoff - premium
Here, strike price = 0.65 and put premium =0.00003
Now price on expiry = 0.70 , so put will not be exercised, payoff = 0
Profit = payoff - premium = 0 -0.00003 = - 0.00003
Answer : e : - 0.00003
now in second case, call is sold
so seller will receive a premium, it is seller's income
payoff is zero, if price on expiry is less than strike price
otherwise negative payoff, payoff = strike price - price on expiry
strike price = 0.65 and Premium received on sell of call = 0.00046
now price on expiry is higher than strike price, so negative payoff
Payoff = strike price - price on expiry = 0.65 -0.70 = -0.05
Profit = payoff + premium = - 0.05 + 0.00046 = - 0.04954
Answer : h : - 0.04954