1. A call option on Canadian dollars with a strike price of $.60 is purchased by a speculator for a premium of $.06 per unit. Assume there are 50,000 units in this option contract. If the Canadian dollar’s spot rate is $.65 at the time the option is exercised, what is the net profit per unit and for one contract to the speculator? What would the spot rate need to be at the time the option is exercised for the speculator to break even? What is the net profit per unit to the seller of this option?
Answer:
The net Profit per unit to the speculator = $.65 - $.60 - $.06 = -$.01
The net profit one contract to the speculator = 50,000 * ($.65 - $.60 - $.06) = -$500
The spot rate needs to break even = $.60 + $.06 = $.66
The net profit per unit to the seller = $.06 – ($.65 - $.60) = $.01
2. A put option on Australian dollars with a strike price of $.80 is purchased by a speculator for a premium of $.02. If the Australian dollar’s spot rate is $.74 on the expiration date, should the speculator exercise the option on this date or let the option expire? What is the net profit per unit to the speculator? What is the net profit per unit to the seller of this put option?
Answer:
The speculator’s choice = exercise the option
The net Profit per unit to the speculator = $.80 - $.74 - $.02 = $.04
The net profit per unit to the seller = $.02 – ($.80 - $.74) = -$.04
3. Mike Suerth sold a call option on Canadian dollars for $.01 per unit. The strike price was $.76, and the spot rate at the time the option was exercise was $.82. Assume Mike did not obtain Canadian dollars until the option was exercised. Also assume that there are 50,000 units in a Canadian dollar option. What was Mike’s net profit on the call option?
Answer:
Mike’s net profit = 50,000 * ($.01 – ($.82 - $.76)) = 50,000 * (-$.05) = -$2500
4. Alice Duever purchased a put option on British pounds for $.04 per unit. The strike price was $1.80, and the spot rate at the time the pound option was exercised was $1.59. Assume there are 31,250 units in a British pound option. What was Alice’s net profit on the option?
Answer:
Alice’s net profit on the option = 31,250 * ($1.80 - $1.59 - $.04) = 31,250 *
$.17 = $5312.5
5. Assume that on November 1, the spot rate of the British pound was $1.58 and the price on a December futures contract was $1.59. Assume that the pound depreciated during November so that by November 30 it was worth $1.51.
a. What do you think happened to the futures price over the month of November? Why?
b. If you had known that this would occur, would you have purchased or sold a December futures contract in pound on November1?
Answer:
a. I think the futures price over the month of November would be going down, because the spot rate of pound depreciated during November.
b. If this would occur, I would have sold a December futures contract in pound on November1; for I would have the net profit per unit = $1.59 - $1.51 = $.08
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