4. You own one Nov. 20 put options contact on Canadian dollar with K = $0.8050...

4. You own one Nov. 20 put options contact on Canadian dollar with K = $0.8050 for which you paid a premium of $0.01/C$. The spot exchange rate today is $0.7900. (i) How would you classify this option today, in-the-money or out-of-the-money? (ii) What is your profit/loss if you sell this option today if it is trading at a premium of $0.015/C$? Contract size is C$100,000 and the U.S. interest rate is 2%. Assume that you bought this option in Sept 20.

5. (a) What is the payoff profile of a buyer and a writer of an option?

(b) What causes option’s premium to change over time?

Expert Solution

The payoff profile is a follows : -

Call buyer- call buyer makes a profit when the stock price moves away upside from the strike price. The higher the price moves, so does the premium. If the price is below the strike price, the option is not exercised and it lapses govong a loss of premium. Unlimited profit potential and loss is limited to premium paid.

Call writer - Call writer is in opposite side of call biyer. The max profits he can make is premium received thats only when the stock price is below the strike price. So unlimited loss potential and limited profit potential.

Put buyer - put buyer makes profits only when stock prices moves away downside the strike price. If the stock price is above the strike price, it is not exercised and lapses. Max lprofit is the strike price as it can not fall below 0. Max loss is premium paid.

Put writer:- put writer is in the opposite side of the put buyer. Max profit is the premium received and max loss is strike price.

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jeff jeffy answered 1 year ago

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