Question

One year ago, you bought a put option on 500,000 euros with an expiration date of one year. You paid a premium on the put option of $.03 per unit. The exercise price was $1.30. Assume that one year ago, the spot rate of the euro was $1.29, the one-year forward rate exhibited a discount of 3%, and the one-year futures price was the same as the one-year forward rate. From one year ago to today, the euro depreciated against the dollar by 2 percent. Today the put option will be exercised (if it is feasible for the buyer to do so).

a. Determine the total dollar amount of your profit or loss from your position in the put option.

b.Now assume that instead of taking a position in the put option one year ago, you sold a futures contract on 500,000 euros with a settlement date of one year. Determine the total dollar amount of your profit or loss.

Answer 1

		Total amount paid for buying the Put Option	$15,000	(500000*$0.03)
		Spot Rate at the time of buying Put Option	$1.29
		Exercise Price of Put option	$1.30
		Spot Rate of 1 dollar in tems of Euro=1/1.29	0.7751938	Euro
		Depreciation of Euro=2% in one year
		Spot rate of 1 dollar after one year0.775194*1.02	0.79069767	Euro
		Spot Rate for 1 Euro after one year =1/0.790698=	$1.2647	Dollar
	a	Dollar amount of Profit or Loss in PUT OPTION
		Payoff per Euro=(1.30-1.2647)=	$0.0353
		Total Payoff for 500000*0.0353=	$17,647
		Profit =17647-15000=	$2,647
	b	Profit/(Loss )on Futures Contract:
		One Year Forward Rate per Euro =(1-0.03)*1.29=	$1.2513
		Price of Futures Contract per Euro	$1.2513
		Settlement Price of Futures Contract per Euro	$1.2513
		Profit/(Loss) per Euro=(1.2513-1.2647)	($0.0134)
		Total Profit/(Loss) in Futures Contract =500000*0.0134=	($6,702.94)
		Total LOSS	$6,702.94