Question

The existing spot rate of the Canadian dollar is $.80. The premium on a Canadian dollar put option is $.03. The exercise price is $.84. The option will be exercised on the expiration date if at all. If the spot rate on the expiration date is $.82, the profit as a percent of the initial investment (the premium paid) is:

a) 0 percent
b) 25 percent
c) 50 percent
d) 125 percent
e) none of the above

Answer 1

Put option will be exercised only when price on expiry is lower than strike price

Here strike peice = 0.84 and price on expiry =0.82, so put will be exercised

Payoff = strike price - price on expiry = 0.84-0.82 =0.02

Profit = Payoff - premium paid = 0.02 -0.03 = -0.01

so there is a loss which is = -0.01/0.03 = - 33.33%

so there is a loss and no profit

Answer : a) 0% [Thumbs up please]