One year ago, you purchased a put option on 100,000 euros with an expiration date of 1 year. You received a premium on the put option of $.04 per unit. The exercise price was $1.22. Assume that 1 year ago, the spot rate of the euro was $1.20, the 1-year forward rate exhibited a discount of 2 percent, and the 1-year futures price was the same as the 1-year forward rate. From 1 year ago to today, the euro depreciated against the dollar by 4 percent. Today the put option will be exercised (if it is feasible for the buyer to do so). a. Determine the total dollar amount of your profit or loss from your position in the put option. Explain through contingency graph. b. Now assume that instead of taking a position in the put option 1 year ago, you sold a futures contract on 100,000 euros with a settlement date of 1 year. Determine the total dollar amount of your profit or loss. Show in a graph.
One year ago, you purchased a put option on 100,000 euros with an expiration date of 1 year. You
received a premium on the put option of $.04 per unit. The exercise price was $1.22. Assume that 1 year
ago, the spot rate of the euro was $1.20, the 1-year forward rate exhibited a discount of 2 percent, and the
1-year futures price was the same as the 1-year forward rate. From 1 year ago to today, the euro
depreciated against the dollar by 4 percent. Today the put option will be exercised (if it is feasible for the
buyer to do so).
a. Determine the total dollar amount of your profit or loss from your position in the put option. Explain
through contingency graph.
b. Now assume that instead of taking a position in the put option 1 year ago, you sold a futures contract on 100,000 euros with a settlement date of 1 year. Determine the total dollar amount of your profit or loss.
Show in a graph.
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