Question

a. A speculator purchased a call option on Japanese Yen at a strike price of $0.70 and for a
      premium of $.06 per unit. At the time the option was exercised if the Japanese Yen spot
      rate was $.75

a) Find the speculator’s net profit per unit?

b) If each contract is made up of 62500 units what is the net profit per contract?

c) At which spot price will the speculator break even?

d) What is the net profit per unit to the seller of the call option?

b. A put option on euros is available with a strike price of $1.29. This is purchased by a
      speculator for a premium of $0.03. If the euro spot rate on the day of expiration is $1.24,
      indicate if the speculator should exercise the option on this date or let it expire. What is the
      net profit per unit to the speculator? What is the net profit per unit to the seller of this put
      option?

Answer 1

(A) Call Option Strike = K = $ 0.7 per Yen and Current Price = S = $ 0.75 per Yen, Call Premium = $ 0.06 per Yen

(a) Speculator's Net Profit per unit (Yen) = 0.75 - 0.7 - 0.06 = - $ 0.01 per Yen

(b) Contract Size = 62500 Yen(units), Total Net Profit = 62500 x 0.01 = $ 625

(c) Speculator's :

Let the current spot price be $ K per yen and Cash Inflow = (K - 0.7) $ per yen

Cash Outflow = $ 0.06 per yen

Therefore, K - 0.7 = 0.06

K = $ 0.76 per yen

(d) For the option seller:

Cash Inflow = $ 0.06 per yen

Nominal Loss = 0.7 - 0.75 = $ 0.05 per Yen

Net Profit Per Yen (unit) = 0.06 - 0.05 = $ 0.01 per Yen

NOTE: Please raise a separate query for the solution to the second unrelated question.