Question

1. John sold a put option on Euro for $.04 per unit. The strike price was $1.30, and the spot rate at the time the option was exercised was $1.27. Assume John immediately sold off the Euro received when the option was exercised. Also assume that there are 200,000 units in a Euro option. What was John’s net profit on the put option?

Answer 1

John Sold Put Option so he will receive a premium for each option. Premium received ( p) = $.04

Now the Strike Price is $1.30 and the exercised price is $1.27.

Since the exercised price is below strike price buyer of the put option will exercise the option.

Net Payment require to Pay the buyer = Strike Price -   exercised price = $1.30 - $1.27 = $ 0.03

Total Profit Each option for Joh will be = Premium received - Net Payment =  $.04 - $ 0.03 = $ 0.01

John’s net profit on the put option = Total Profit Each option * No of Units = 0.01 * 200,000 = $ 2,000

Answer: John’s net profit on the put option = $ 2,000