Question

To protect £1.25 million receivable next month firm can sell 20 pound futures (contract size £62,500) at $1.5600 or it can buys 40 put option contract (each £31,250) with a strike price of $1.5612 at a premium of 2 cents per pound. The pound is expected to trade in the range of $1.5250 to $1.6010, $1.5400 being the most likely price. Calculate firm's profit/loss on the portfolio of put option position and original contract if pound settles at the lowest, most likely and the highest value.

9.a. (7 points) Calculate firm’s profit/loss on the portfolio of futures position and original contract if pound settles at the lowest, most likely and the highest value.

Answer 1

Particulars	Lowest	Most Likely	Highest value
Rate Next Month (S)	1.525	1.54	1.601
Premium paid million (1.25*0.02)	0.025	0.025	0.025
Payoff from put million [Max (1.5612-S)*1.25),0)	0.045	0.026	0.000
Profit / loss from put million	0.020	0.001	-0.025

Particulars	Lowest	Most Likely	Highest value
Rate Next Month	1.525	1.54	1.601
Selling Rate	1.56	1.56	1.56
Profit / loss per pound	0.035	0.020	-0.041
Number of pounds (million)	1.250	1.250	1.250
Total Profit/Loss (million)	0.0438	0.0250	-0.0512