Question

# Andrea is an option speculator. She anticipates the Canadian dollar to depreciate from its current level...

Andrea is an option speculator. She anticipates the Canadian dollar to depreciate from its current level of \$0.90 to \$0.85. Currently, Canadian dollar call options are available with an exercise price of \$0.91 and a premium of \$0.02. Also, Canadian dollar put options are available with an exercise price of \$0.88 and a premium of \$0.02. If the future spot rate of the Canadian dollar is \$0.85, what is Andrea's profit or loss per unit?

Hi,

Given:

• Spot price (At time of purchase) = \$ 0.9
• Spot price (at expiry) = \$ 0.85
• Call Option (Strike = \$0.91) = \$0.02
• Put option (Strike= \$0.88) = \$ 0.02

Rules:

Solution:

Long Call option= - \$0.02 + (Spot - Strike) = -0.02 + (0.85 - 0.91) = - \$0.08 per unit

Short Call option = + \$0.02 + (Strike - Spot) = +0.02 + (0.91 - 0.85) = + \$ 0.02 per unit (Seller of an option gets only premium as profit)

Long put option = - \$0.02 + (Strike - Spot) = -0.02 + (0.88 - 0.85) = + \$0.01 per unit

Short put option = + \$0.02 + (Spot - Strike) = +0.02 + (0.85 - 0.88) = - \$0.01 per unit

From Andreas perspective, she would have gone Long in a Put option & Short a call option to get profit as she anticipates the Canadian dollar to depreciate from its current level.