Question

You have entered in a put option contract on British pound at a price of $0.04 per British pound. When the option was exercised the dollar was selling of 0.63 British pound. Compute your net profit from the option if the exercise price was $1.80 and size of option is 50.000

a. Pound 634.92
b. Pound 8.634.92
c. Pound 556.500
d. Pound 56,500​

Answer 1

To compute the net profit from the put option, subtract the cost of purchasing the option from the profit earned from exercising the option. In this case, the net profit is $29,500.

Step-by-step explanation:

To compute the net profit from the option, we need to calculate the profit from exercising the put option and deduct the cost of purchasing the option.

The exercise price of the option is $1.80 per pound. When the option was exercised, the exchange rate was 0.63 British pounds per dollar.

Therefore, the investor would receive 50,000 pounds (size of the option) * 0.63 (exchange rate) = 31,500 dollars. The cost of purchasing the option is 50,000 pounds * 0.04 dollars per pound = 2,000 dollars.

The net profit is the exercise price minus the cost of purchasing the option: 31,500 - 2,000 = 29,500 dollars.