Frodo has purchased an option to sell 100 euros for USD after 2 weeks at an exah

Question

Frodo has purchased an option to sell 100 euros for USD after 2 weeks at an exahcnge rate of 1 euro = 1.2 USE. Frodo should exercise his option if after 2 weeks, the USD- euro exchange rate becomes:
A. 1 euro = 1.3 USD B. 1 euro = 1.1 USD C. 1 euro = 2 USD
Which one is right? And why ??
Thank you so much. Frodo has purchased an option to sell 100 euros for USD after 2 weeks at an exahcnge rate of 1 euro = 1.2 USE. Frodo should exercise his option if after 2 weeks, the USD- euro exchange rate becomes:
A. 1 euro = 1.3 USD B. 1 euro = 1.1 USD C. 1 euro = 2 USD
Which one is right? And why ??
Thank you so much.
A. 1 euro = 1.3 USD B. 1 euro = 1.1 USD C. 1 euro = 2 USD
Which one is right? And why ??
Thank you so much.

Explanation / Answer

Ans:

Option B

1 euro = 1.1 USD

Analysis

If an option to sell is purchased, it means you have a right to sell.In this case you can sell 100 euros@1.2 USD.

After 2 weeks, if the market exchange rate of 1 euro is above 1.2 USD, then it is profitable to sell in the market.so if exchange rate of 1 euro is above 1.2 USD, option should not be exercised.

After 2 weeks, if the market exchange rate of 1 euro is below 1.2 USD, then it is not profitable to sell in the market. In such case option should be exercised.

Hence Frodo should exercise his option if after 2 weeks, the USD- euro exchange rate becomes 1 euro = 1.1 USD.

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