Question

Calculate the long position payoff at expiration for a put option on the British pound where the underlying is at $1.438 at expiration, the options are on 125,000 British pounds, and the exercise price is $1.55.

Answer 1

The long position payoff at expiration for a put option on the British pound with an exercise price of $1.55 and an underlying price of $1.438 is $14,000, calculated by the intrinsic value of the option multiplied by 125,000 British pounds.

Step-by-step explanation:

The question involves calculating the payoff at expiration for a long position in a put option on the British pound. With an exercise price of $1.55 and the underlying asset at $1.438 at expiration, we can determine the intrinsic value of the put option since it is in the money. To calculate the payoff, multiply the difference between the exercise price and the underlying asset's price at expiration ($1.55 - $1.438) by the number of units of the underlying asset, which is 125,000 British pounds. The payoff at expiration would be (1.55 - 1.438) * 125,000 = $14,000. This represents the gross profit before accounting for premiums paid for the option.