Question

5. You buy a put option on the £ for $.021/£. The option contract size is £500,000. The exercise price is $1.45/£. When the option matures, the spot rate is $1.4055/£. What is your overall profit/loss on the put option?

Answer 1

Solution :

As per the information given in the question we have

Exercise Price of the Put option = $1.45/£.

Spot price on Expiry = $1.4055/£.            

Since the Exercise Price is greater than the spot price on expiry, the Put Option is said to be IN the money

(Since at the Exercise price 1 pound can be sold for $ 1.45 , whereas as per the spot price on option maturity, 1 pound can be sold for a lesser price of $ 1.4055 )

Since the Option is IN the money the value of the option is

= Exercise Price – Spot price on expiry

= $ 1.45 - $ 1.4055 = $ 0.0445

Thus the value of the Option = $ 0.0445

Further as per the information given in the question the put option is purchased for $ 0.021

Thus the profit on the put option = Value of the option – Purchase price of the option

= $ 0.0445 - $ 0.021 = $ 0.0235

Since the Option contract size = £ 500,000,

The overall profit on the contract is

= Profit per put option * Option contract size

= $ 0.0235 * £ 500,000

= $ 11,750

Thus the Overall profit on the put option = $ 11,750