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Speculating with Currency Put Options. John purchased a put option on British pounds for $.04 per...

Speculating with Currency Put Options. John purchased a put option on British pounds for $.04 per unit. The strike price was $1.86 and the spot rate at the time the pound option was exercised was $1.61. Assume there are 31,850 units in a British pound option. What was John's net profit on the option?

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Answer #1

Put option is the right to sell a specified asset at a specified price on a future date.

Since the spot rate on maturity is lower than the strike price, the option will be exercised

Net Profit = (Strike Price - Spot Rate - Option premium paid)*Number of units

= (1.86-1.61 - 0.04)*31,850

= $6,688.5

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