The current spot exchange rate is $1.55 = â¬1.00 and the three-month forward rate is $1.60 = â¬1.00. Consider a three-month American put option on â¬62,500 with a strike price of $1.50 = â¬1.00. If you pay an option premium of $5,000 to buy this put, at what exchange rate will you break-even?

A. $1.58 = â¬1.00

B. $1.62 = â¬1.00

C. $1.50 = â¬1.00

D. $1.68 = â¬1.00

E. $1.42 = â¬1.00

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Hubert KochLv2

28 Sep 2019

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8. a) Consider a PUT option on euros with a strike price of $1.05/â¬ and an option premium of 8 cents per euro. Calculate the profit (net of the cost of the option) to the holder of the option for the following different possible spot rates at option maturity: $0.90/â¬, $0.95/â¬, $1.00/â¬, $1.05/â¬, $1.10/â¬, $1.15/â¬, $1.20/â¬. What is the break-even spot rate (the spot rate at which the profit is exactly zero)? (10 points)

b) List any two important differences between a call option and a put option. (10 points)

Looking at the following options table:

	British Pound Option Prices (U.S. CENTS per Pound, 62,500 pounds per contract)
US cents/Â£		Call	Call	Call	Put	Put	Put
Spot Rate	Strike Price	May	June	July	May	June	July
144.8	144	0.88	1.42	1.44	0.52	1.06	-----
144.8	145	0.42	1.02	-----	-----	-----	-----
144.8	146	0.2	0.68	0.72	1.75	2.32	-----

QUESTION A:	Give me one example of an option that is out of the money? Be specific as far as month and strike price. Explain your answer?
QUESTION B:	Give me one example of an option that is in the money? Be specific as far as month and strike price. Explain your answer?
QUESTION C:	Which, if any, option is at the money? Explain your answer.
QUESTION D:	Looking at the July 144 CALL option, break down the option's premium into its Intrinsic Value and Time Premium components
	Show your calculations.
QUESTION E:	Looking at the June 146 PUT option, break down the options premium into its Intrinsic Value and Time Premium components
	Show your calculations.
QUESTION F :	If you purchase two (2) June 145.0 call options what will be the total amount of your premium that you need to pay?
QUESTION G:	Referring to QUESTION F, when do you pay the option premium, on the settlement date or on the date that you purchase the options?
QUESTION H:	Today you purchase three (3) June 144.0 Puts. On settlement date the spot rate = 142.5 cents per pound, what is your net profit/loss?
	Show your calculations.
QUESTION H:	Today you purchase two (2) June 144.0 Calls. On settlement date the spot rate = 143.5 cents per pound, what is your net profit/loss?

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