Question

A U.S. exporter will receive a Yuan1,000,000 payment from a Chinese importer in 120 days. They decide to purchase an American put option on euros with the following details: • Contract size: Yuan125,000 • Exercise price: $1.65/Yuan • Call option premium: $0.03 per euro What is the overall profit/loss given the following future spot rates? Should the importer exercise the option in each scenario? E) $1.70/euro F) $1.65/euro G) $1.62/euro H) $1.50/euro

Answer 1

A put option is the right to sell a specified security at a specified price on a future date.

E)Since the market price is higher than the exercise price, the importer should not exercise the option (better to sell in the market)

Loss = Premium paid

= 0.03*1,000,000

= $30,000

F)The importer is indifferent. Loss = premium paid

= 0.03*1,000,000

= $30,000

G)Since the exercise price is more than the market price, the importer should exercise the option

Profit = (1.65-1.62-0.03)*1,000,000

= $0

H) Since the exercise price is more than the market price, the importer should exercise the option

Profit = (1.65-1.50-0.03)*1,000,000

= $120,000