Question

Currently, the spot rate is $1.33/£. As a trader, you believe that the British pound will depreciate significantly in the near future. You decide to speculate by buying a December put option with a strike price of $1.35/£ and a premium of $0.05/£. Please answer the following questions:

1. Explain briefly why buying a put option makes sense in this case.

2. How much is the intrinsic value of the option? And how much is the time value?

3. Please fill in the blanks of the table below. Spot rate at maturity in December Exercise or not? Net profit Moneyness (ITM, ATM or OTM)

$1.20/£

1.25

1.30

1.35

1.40

1.45

Answer 1

Answer 1)

It makes sense to buy put option because it is expected that the Pound will depriciate in the future and put option gives profits when prices falls.

Answe 2)

Intrinsic Value = Current Price - Strike Price OR 0 ; whichever is higher

= 1.33 - 1.35 OR 0 ; whichever is higher

= 0

TIme Value of Option = Premium - Intrinsic Value

= 0.05 - 0

= 0.05

Answer 3)

Strike Price	Closing Price	Exercise/ Not Exercise	Profit Moneyness
1.35	1.20	Exercise	In the Money
1.35	1.25	Exercise	In the Money
1.35	1.30	Exercise	In the Money
1.35	1.35	Indifferent	At the Money
1.35	1.40	Not Exercise	Out of Money
1.35	1.45	Not Exercise	Out of Money