Question

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?

Answer 1

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:

• Seller of an option = receives premium (+)
• Buyer of an option = pays premium (-)

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.