Question

please no excel usage Assume you create a portfolio that consists of a long position in two 3-month European call options and a short position in one 3-month European put option on euros. Both the call and the put options have 125,000 euros attached. The strike price for the call and put options is $1.1 and $1.2, respectively. The call and put premiums are $.02 and $.05, respectively.Calculate the profit/loss (in terms of USD) on your portfolio if the spot rate is $1.25/euro when the options expire. Round intermediate steps to four decimals and your final answer to two decimals. Do not use currency symbols or words when entering your response.

Answer 1

Long position in two 3-month European call options, Strike price=USD 1.1

Payoff on call Option:

Assume Spot Rate at expiration = S US dollar /Euro

If S< or =1.1,Payoff =Nil

If S> 1.1, Payoff =2* (S-1.1) per Euro(Gain)

For 125,000 Euros, Payoff =2*125000*(S-1.1)

Short position in one 3-month European put option, Strike Price=USD 1.2

Payoff on Put Option:

Assume Spot Rate at expiration = S US dollar /Euro

If S> or =1.2,Payoff =Nil

If S< 1.2, Payoff =(S-1.2) per Euro (Loss)

For 125,000 Euros, Payoff =125000*(S-1.2)

Premium to be paid for Buying (Long)Call options =125000*2*0.02 USD=5,000 USD

Premium received for Selling (Short) Put Options =125000*0.05=6,250 USD

Net premium received =6250-5000=1250 USD…………(1)

Profit/loss (in terms of USD):

Long Call:

, Payoff =2*125000*(S-1.1)

S=1.25

Payoff =2*125000*(1.25-1.1)=37,500 USD……….(2)

Short Put:

If S> or =1.2,Payoff =Nil

S=1.25

Payoff = o …………….(3)

Total Profit =(1)+(2)+(3)=1250+37500+0=38,750USD

Profit in terms of USD

38,750