Question

Bates Co. has purchased Canadian dollar put options for specula­tive purposes. Each option was purchased for a premium of $.015 per unit, with an exercise price of $.78 per unit. Bates 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.

(1) What is the net profit or loss per unit to Bates Co. based on the following listed possible spot rates of the Canadian dollar on the expiration date.   

Possible Spot Rate of Canadian Dollar on Expiration Date
$0.76
$0.77
$0.78
$0
$0.80
$0.81

(2) For each possible spot rate, will the option be exercised? Why or why not?

Please show how answers are derived.

Answer 1

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