Question

Assume a put option on euros is written with a strike price of $1.0800/€ at a premium of $0.0038/€ and with an expiration date three months from now. The option is for €100,000. Calculate your profit or loss should you exercise before maturity at a time when the euro is traded spot at $1.2500/€, $1.0100/€, $1.1000/€, $1.2500/€.

Answer 1

Put option is the right to sell underlying asset at a specified price on a future date.

The option is exercised when the strike price is higher than the market price, otherwise it is better to sell in the market. Loss in that case is equal to premium paid

When price = $1.25, Profit = Not exercised. Loss = -0.0038*100,000 = -$380

When price = $1.01, Profit = Exercised. Profit = (1.08-1.01-0.0038)*100,000 = $6,620

When price = $1.10, Profit = Not exercised. Loss = -0.0038*100,000 = -$380

When price = $1.25, Profit = Not exercised. Loss = -0.0038*100,000 = -$380