Question

You are given the following information on American options for the Euro against the US dollar, unless otherwise stated

Compute the profit or loss for each alternative.

Provide computational support for your final answers.

Type of Option	Maturity (days)	Strike Price $/Euro)	Option premium (% of strike price)	Spot rate, $/Euro (on day)	Profit/loss
CALL	45	1.4000	4	1.5000 (44)
PUT (European)	75	1.7000	7	1.6500 (72)
CALL (European)	75	1.8500	6	1.9500 (75)

Answer 1

1.Call option strike price 1.40 $/Euro

Premium = 1.40 * 0.04= $0.056

Profit = max(St - X, 0) - Premium paid

Profit = max(1.50- 1.40, 0) - 0.056

Profit = 0.1 - 0.056

Profit = $0.044

2.Put option strike price 1.70 $/Euro

Premium = 1.70 * 0.07 = $0.119

Profit = max(X - St, 0) - Premium paid

Profit = max(1.70 - 1.65, 0) - 0.119

Profit = 0.05 - 0.119

Profit = -$0.069

Or a loss of $0.069

3.Call option strike price 1.85 $/Euro

Premium = 1.85 * 0.06 = $0. 111

Profit = max(St - X, 0) - Premium paid

Profit = max(1.95 - 1.85 , 0) - 0.111

Profit = 0.1 - 0.111

Profit = -$0.011

Or a loss of $0.011