Question

Selling Currency Call Options. Juan Bulsara sold a call option on Australian dollars (AUD) for USD.02 per unit. The strike price was USD .86 (the exchange rate we use is AUDUSD), and the spot rate at the time the option was exercised was USD .82. Assume Mr. Bulsara did not obtain AUD until the option was exercised. Also, assume that there are 50,000 units in an AUD option. What was Mr. Bulsara’s net profit on the call option? (5 points)

Selling Currency Put Options. Brian May sold a put option on AUD for the premium at USD .04 per unit. The strike price was USD .85 (the exchange rate we use is AUDUSD), and the spot rate at the time the option was exercised was USD .82. Assume Brian immediately sold off the AUD received when the option was exercised. Also, assume that there are 50,000 units in an AUD option. What was Brian’s net profit on the put option? (5 points)

Speculating with Currency Put Options. Queen Co. has purchased AUD options for speculative purposes. Each option was purchased for a premium of USD .02 per unit, with an exercise price of USD .89 per unit. (the exchange rate we use is AUDUSD) Queen Co. will purchase the AUD 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 Queen Co. based on the listed possible spot rates of the AUD on the expiration date. (each row: 4 points with a total 24 points) Possible St (AUDUSD) Whether the option Net Profit (Loss) per Unit on Expiration Date is exercised? (Y or N) if Spot Rate Occurs .81 .86 .89 .92 .95 1.01

Answer 1

Selling Currency Call Options. Juan Bulsara sold a call option on Australian dollars (AUD) for USD.02 per unit. The strike price was USD .86 (the exchange rate we use is AUDUSD), and the spot rate at the time the option was exercised was USD .82. Assume Mr. Bulsara did not obtain AUD until the option was exercised. Also, assume that there are 50,000 units in an AUD option. What was Mr. Bulsara’s net profit on the call option?

Net profit = N x [C - max (S - K, 0)] = 50,000 x [0.02 - max (0.82 - 0.86, 0)] = $ 1,000

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Selling Currency Put Options. Brian May sold a put option on AUD for the premium at USD .04 per unit. The strike price was USD .85 (the exchange rate we use is AUDUSD), and the spot rate at the time the option was exercised was USD .82. Assume Brian immediately sold off the AUD received when the option was exercised. Also, assume that there are 50,000 units in an AUD option. What was Brian’s net profit on the put option? (5 points)

Net profit = N x [P - max (K - S, 0)] = 50,000 x [0.04 - max (0.85 - 0.82, 0)] = $ 500

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Speculating with Currency Put Options. Queen Co. has purchased AUD options for speculative purposes. Each option was purchased for a premium of USD .02 per unit, with an exercise price of USD .89 per unit. (the exchange rate we use is AUDUSD) Queen Co. will purchase the AUD 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 Queen Co. based on the listed possible spot rates of the AUD on the expiration date. (each row: 4 points with a total 24 points) Possible St (AUDUSD) Whether the option Net Profit (Loss) per Unit on Expiration Date is exercised? (Y or N) if Spot Rate Occurs .81 .86 .89 .92 .95 1.01

the net profit (or loss) per unit to Queen Co. = max (K - S, 0) - P = max (0.89 - S, 0) - 0.02

Hence, the table is:

Spot rate, S	Profit / (Loss)
0.81	0.06
0.86	0.01
0.89	-0.02
0.92	-0.02
0.95	-0.02
1.01	-0.02