Question

David buys a put option on pound with a strike price of $1.8500/₤ at a premium of 2.60¢ per pound ($0.0260/₤) for an expiration date three months from now. The option contract is for ₤62,500. What is David’s gains/losses if the spot rate is $1.9700/₤?

Answer 1

Put option is option to sell underlying security at specified price. If spot rate at expiration is less than Strike price, option will be exercised, Payoff of put option = Strike price - spot rate at expiration

If spot rate at expiration is More than Strike price, option will not be exercised, Payoff of put option = Strike price - spot rate at expiration = 0

Gain or loss of option = (Payoff of put option - premium paid)*contract size

Strike price 1 pound = 1.8500

Spot rate at expiration = 1.9700

Payoff of put option per pound= 1.8500-1.9700

=0

(as option will not be exercised, value shall be 0)

Net gain or loss of option = (0-0.0260)*62500

=-1625

So David will have loss of $1625