Question

I have the answers, I just need to know how to find the answers myself.

a) Assume that a speculator purchases a European style put option on euros for $0.0599 per unit. The strike rate is 1.1231. A euro option represents 125,000 units. Assume that at the time of the purchase, the spot rate of the euro is $1.1728 and changes to $1.191 by the expiration date. The net profit for the speculator based on the information above is:

Answer format: round to two decimals. $1.12

Correct Answer: -7,487.50 ($)

c) Assume that a speculator purchases a European style call option on British pounds for $0.0582 per unit. The strike rate is 1.1291. The pound option represents 125,000 units. Assume that at the time of the purchase, the spot rate of the pound is $1.1491 and changes to $1.1868 by the expiration date. The net profit for the speculator based on the information above is:

Answer format: round to two decimals. $1.12

Correct Answer: -62.50 ($)

d)

A U.S. company exports products to a Chinese firm and will receive a payment of ¥1,717,136 in a year. Today's spot rate of yuan is $0.1522 and the 1-year forward rate is $0.1587. The company enters the forward contract. One year later the spot rate of yuan is $0.1575. How many dollars will the company receive then? Answer format: Round to two decimals. Example :$1.12 Correct Answer: 272,509.48

Answer 1

Solution a
Put option gives right to Put option holder the right to sell. So, if the sell price is less than
the exercise price then the put option holder will exercise the put option and will sell at
exercise price. If the selling price is more than the exercise price, the option holder will sell at
market price and will not exercide the put option
Strike price	$             1.1231
Market price	$             1.1910
Since market price for selling EURO is higher, the put option will not be exercised.
The maximum loss will be equal to Put option price paid earlier
Premium paid	$             0.0599
Units	125,000
Total premium paid	125000*0.0599
Total premium paid	$         7,487.50
Solution b
Call option gives right to call option holder the right to purchase. So, if the market price is more than
the exercise price then the call option holder will exercise the call option and will purchase at
exercise price. If the market price is less than the exercise price, the option holder will purchase at
market price and will not exercide the call option
Strike price	$             1.1291
Market price	$             1.1868
Since strike price is lower, the call option will be exercised.
Gain	125000*(1.1868-1.1291)
Gain	$         7,212.50
This gain will be compensation by call option price paid earlier
Premium paid	$             0.0582
Units	125,000
Total premium paid	125000*0.0582
Total premium paid	$         7,275.00
Net gain/(loss)=	$             (62.50)
Solution D
In case of forward contract, the settlement will be done at agreed forward price
Payment in Yuan	1,717,136
Forward rate agreed	$             0.1587
Amount received	1717136*0.1587
Amount received	$    272,509.48
1 year later spot rate or current rate will be ignored.