Question

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:

	$80,000 profit
	$30,000 loss
	$50,000 loss
	$30,000 profit

Answer 1

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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