You buy a three-month put option on £1,000,000 at a strike price of $1.32/£ and a premium of $0.05/£. What is your total profit or loss if the spot exchange rate is $1.40/£ in three months time?
Question 38 options:
The profit or loss is computed as shown below:
= (strike price - price at expiration - premium paid) x 1,000,000
= ($ 1.32 - $ 1.40 - $ 0.05) x 1,000,000
= - $ 130,000
But loss in case of buying a put option is restricted to the amount of premium paid, so the loss will be computed as follows:
= Premium paid x 1,000,000
= $ 0.05 x 1,000,000
= $ 50,000 Loss
So, the correct answer is option of $ 50,000 loss
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