One year ago, you sold a put option on 100,000 euros with an expiration date of 1 year. you received a premium on the put option
of $0.04 per unit. the exercise price was $1.22. assume that 1 year ago the spot rate of the euro was $1.20, the 1-year forward rate exhibited a discount of 2 percent, and the 1-year futures price was the same as the 1-year forward rate. from 1 year ago to today, the euro depreciated against the dollar by 4 percent. today the put option will be exercised (if it is feasible for the buyer to do so).
There are two problems for this question:1. What is the total dollar amount of your profit and loss: Put option premium is equal to 0.04 per unit. The exercise price is 1.22 One option contract is 100,000 Selling price is 1.20 -Purchase prise is - 1.22 -Premium paid is +0.04 Net profit is = 0.02 x 100,000 = 2,000 – 80 = 1,920
2. Now undertake that as an alternative of taking a position in the put option one year ago, you sold a future's contract on 100,000 euros with a payment date of one year. Find the total dollar amount of your profit or loss. Solution: Contract to buy: $1.20 x 100,000 = 120,000 at payment date. Contract to sell: $1.22 x 100,000 = 122,000 at settlement date Settle contracts: -2,000 - 80 = -$2,080
