Question

A call option on the SGD with a strike price of 0.74 USD/SGD and a maturity of 6 months has a premium bid price of 0.06 USD, and a 1penny bid-ask spread. If you sell these options today on 10,000 SGD, and at maturity the SGD is quoted at bid price of 0.84 USD/SGD, with a 1 penny bid-ask spread, what is your net profit on this position? Note: pay careful attention to which side of the quote you will be trading with at each step

Answer 1

Call option on SGD means to buy SGD and seller of this call option expects the SGD to appreciate against USD. The strike price is 0.74 USD/SGD, that is 0.74 SGD to buy 1 USD. Since the bid is at 0.06USD, the ask will be 0.07USD. At 10,000 SGD, the seller is entering into a contract for USD (10000/0.74) = USD 13513.51 and premium received by the seller will be 13513.51 * 0.06 = USD 810.81

On maturity, the SGD quote is 0.84 USD/SGD i.e. 0.84 SGD to buy 1 USD. Hence the SGD has depreciated against the USD. The outflow for the seller will be USD 13513.51 - (10000/0.85) = USD 1748.81 - the ask price will be higher than the bid price by 1 penny. Now the net loss on this position after adjusting for the premium received for selling the option will be 1748.81 - 810.81 = USD 937.99