XYZ has purchased Canadian dollar put options for speculative purposes. Each opt
ID: 2613199 • Letter: X
Question
XYZ has purchased Canadian dollar put options for speculative purposes. Each option was purchased for a premium of $.02 per unit, with an exercise price of $.86 per unit. XYZ will purchase the Canadian dollars just before it exercises the options (if it is feasible to exercise the options). It plans to wait until the expiration date before deciding whether to exercise the options. In the following table, fill in the net profit (or loss) per unit to XYZ based on the listed possible spot rates of the Canadian dollar on the expiration date. Possible Spot Rate of Canadian Dollar on Expiration Date $.76 $.79 $.84 $.87 $.89 $.91
Explanation / Answer
Possible Spot rate
$ 0.76
$ 0.79
$ 0.84
$ 0.87
$ 0.89
$ 0.91
Exercise Price
$ 0.86
$ 0.86
$ 0.86
$ 0.86
$ 0.86
$ 0.86
Decision*
E
E
E
NE
NE
NE
Profit
$ 0.10
$ 0.07
$ 0.02
$ -
$ -
$ -
Premium
$ 0.02
$ 0.02
$ 0.02
$ 0.02
$ 0.02
$ 0.02
Net Proft
$ 0.08
$ 0.05
$ -
$ (0.02)
$ (0.02)
$ (0.02)
Put option refers to sell a specified amount of an underlying asset at a set price within a specified time. The buyer of a put option estimates that the underlying asset will drop below the exercise price before the expiration date.
*E= Exercise, NE = not exercise
Possible Spot rate
$ 0.76
$ 0.79
$ 0.84
$ 0.87
$ 0.89
$ 0.91
Exercise Price
$ 0.86
$ 0.86
$ 0.86
$ 0.86
$ 0.86
$ 0.86
Decision*
E
E
E
NE
NE
NE
Profit
$ 0.10
$ 0.07
$ 0.02
$ -
$ -
$ -
Premium
$ 0.02
$ 0.02
$ 0.02
$ 0.02
$ 0.02
$ 0.02
Net Proft
$ 0.08
$ 0.05
$ -
$ (0.02)
$ (0.02)
$ (0.02)
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