One year ago, you sold a put option on 200,000 Canadian dollars with an expirati
ID: 2726361 • Letter: O
Question
One year ago, you sold a put option on 200,000 Canadian dollars with an expiration date of one year. You received a premium on the put option of $.03 per unit. The exercise price was $1.11. Assume that one year ago, the spot rate of the The Canadian dollar was $1.09, the one-year forward rate exhibited a discount of 1%, and the one-year futures price was the same as the one-year forward rate. From one year ago to today, the Canadian dollar depreciated against the dollar by 2 percent. Today the put option will be exercised (if it is feasible for the buyer to do so). Show all work and answer all questions. Determine the total dollar amount of your profit or loss from your position in the put option. Now assume that instead of taking a position in the put option one year ago, you sold a futures contract on 200,000 Canadian dollars with a settlement date of one year. Determine the total dollar amount of your profit or loss.
Explanation / Answer
Total premium received = $0.03 * 200000 = $6000
Spot price one year back = $1.09/Canadian dollar.
Spot price today = $1.09 - 1.09*2% = $1.0682/Canadian dollar ( after 2% depreciation of canadian dollar) or $1.07
Exercise price = $1.11/canadian dollar
Since spot price today is less than Exercise price of $1.11, Put buyer has executed that contract and receive differential $1.11 - 1.07 = $0.04/Canadian dollar i.e. 200000*0.04=$8000.
So Loss of Put seller/writer is = 8000- 6000 = $2000
Position of selling Futures one year back:
Future contract price = $1.09 - 1.09*1% = $1.10/canadian dollar (after discount of 1%)
Spot price today = $1.07 /Canadian dollar.
Since party is in short position and spot price today is lower than agreed price , party will gain 1.1-1.07 = 0.03 per canadian dollar. So gain = 200000 * 0.03 = $6000
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