Question

Reska, Inc., has constructed a long euro straddle. A call option on euros with an exercise price of $1.10 has a premium of $.02 per unit. A euro put option has a premium of $.012 per unit. Some possible euro values at option expiration are shown in the following table.

Complete the worksheet and determine the net profit per unit to Reska Inc. for each possible future spot rate.

Value of Euro at Option Expiration

	$0.90	$1.05	$1.50	$2.00
Call
Put
Net

Answer 1

A long straddle position = buying a call + buying a put, both with the same strike price and expiration.

Hence,   the net profit per unit to Reska Inc. = Profit from a long call position + profit from a long put position = max (S - K, 0) - C + max (K - S, 0) - P

S = Future spot rate = Value of Euro at Option Expiration; K = exercise price = $ 1.10; C = 0.02; P = 0.012

Hence, the net profit per unit to Reska Inc. = max (S - 1.10, 0) - 0.02 + max (1.10 - S, 0) - 0.012 = max (S - 1.10, 0) + max (1.10 - S, 0) - 0.032

Value of Euro at Option Expiration, S	Profit from the call option	Profit from the put option	the net profit ($) per unit to Reska Inc.
0.90	-0.020	0.188	0.168
1.05	-0.020	0.038	0.018
1.50	0.380	-0.012	0.368
2.00	0.880	-0.012	0.868