Question

1. (4 pts) Auburn Co purchased Canadian dollar put options for speculative purposes.  Each option was purchased for a premium of US$0.03 per unit, with an exercise price of US$0.86/1CAD.  Auburn will purchase the Canadian dollars just before it exercises the options (if it is feasible to exercise the options).  It plans to wait until the expiration date before deciding whether to exercise the options.  In the following table, fill in the net profit (or loss) per unit to Auburn Co based on the listed possible spot rates (direct quote) of the Canadian dollar on the expiration date

            Possible spot rate of CAD on expiration date        Net Profit (Loss) per unit

                                                US$0.76/1CAD                                  

                                                US$0.79/1CAD                                  

                                                US$0.84/1CAD                                  

                                                US$0.87/1CAD                                  

                                                US$0.89/1CAD                                  

                                                US$0.91/1CAD                                  

Answer 1

Put Option is the right to sell the underlying asset at a specified price on a future date
The Option is exercised only when the market price at maturity is lower than the strike price
Profit = (Strike price- Market Price) - Premium paid
If not exercised, loss = Premium paid
Possible Spot rate	Action	Net Profit/(Loss) per unit
0.76	Exercise	0.07
0.79	Exercise	0.04
0.84	Exercise	-0.01
0.87	Lapse	-0.03
0.89	Lapse	-0.03
0.91	Lapse	-0.03