Question

Use the following information to answer question 4 to 6:

Amazon buys a Mexico Peso put option (contract size: 500,000 Peso) at a premium of $0.0082/Peso. The exercise price is $0.054/Peso:

4.If the spot at expiration is $0.062/Peso, what is the Amazon’s profit?

a. $4,100 loss

b. $100 loss

c. $4,000 loss

d. $8,100 loss

5.If the spot at expiration is $0.050/Peso, what is the Amazon’s profit?

a. $2,000 loss

b. $4,100 loss

c. $2,100 loss

d. $6,100 loss

6.If the spot at expiration is 0.042/Peso, what is the Amazon’s profit?

a. $1,500 gain

b. $1,900 gain

c. $6,000 gain

d. $10,100 gain

Answer 1

NOTE: Under a put option, the underlying asset (which is the peso in this case) is sold at the option's exercise price

(4) Premium $ 0.0082 / Peso, Contract Size = 500000 pesos, Premium paid per contract = 500000 x 0.0082 = $ 4100

Exercise price = $ 0.054 / Peso and Spot at Expiration = $ 0.062 / Peso

As the spot at expiry is above, the exercise price the put option will not be exercised. Hence, Amazon's Profit = - $ 4100

Therefore, the correct option is (a)

(5) Spot at Expiration = $ 0,05 / Peso

Put Option Payoff = (0.054 - 0.05) = 0.004 $ / Peso

Total Payoff = 0.004 x 500000 = $ 2000

Option Premium Paid = $ 4100

Net Prpfit = 2000 - 4100 = - $ 2100

Hence, the correct option is (c)

(6) Spot at Expiration = $ 0,042 / Peso

Put Option Payoff = (0.054 - 0.042) = 0.012 $ / Peso

Total Payoff = 0.012 x 500000 = $ 6000

Option Premium Paid = $ 4100

Net Prpfit = 6000 - 4100 = $ 1900

Hence, the correct option is (b)