Question

Bulldog, Inc., has sold Australian dollar put options at a premium of $.02 per unit, and an exercise price of $.89 per unit. It has forecasted the Australian dollar’s rate over the period of concern as $.86, $.87, $.88, $.89, $.91 and $.92. Determine the net profit (or loss) per unit to Bulldog, Inc., if Australia dollar each level occurs (show detailed analysis; follow the five steps in the teaching notes).

Answer 1

Answer: for each dollar rate we get

-$.01

$.00

$.01

$.02

$.04

$0.5

Explanation: exercise price-premium price=$.89-$.02=$.87

Therefore we are to subtract $.87 from each forcasted dollar rate to get the net profit or loss per each.

$.86-$.87=-$.01

$.87-$.87=$.00

$.88-$.87=$.01

$.89-$.87=$.02

$.91-$.87=$.04

$.92-$.87=$.05

Answer 2

Step-by-step explanation:

At $0.86

$0.86<$0.89

The buyer of the call option will not exercise the option. Net profit will be equal to the premium paid per unit = $0.02/unit.

At $0.87

$0.87<$0.89

The buyer of the call option will still not exercise the option. Therefore, net profit will be equal to the premium paid per unit = $0.02 unit. So net profit = $0.02/unit

At $0.88

$0.88<$0.89

The buyer of the call option will still not exercise the option. Net profit will be equal to the premium paid per unit = $0.02 unit. So net profit = $0.02/unit

At $0.89

$0.89=$0.89

The buyer of the call option will still not exercise the option. Net profit will be equal to the premium paid per unit = $0.02/unit.

At $0.91

The buyer will exercise the option and the net loss to Bulldog Inc will be 0.02/unit ($0.91-$0.89)

So there is no profit and no loss because this is offset by the call premium

Profit = -0.02 (loss on exercise) + 0.02 (call premium) = $0/unit

At $0.92

The buyer will exercise the option. The net loss to Bulldog Inc will be $0.03/unit ($0.92-$0.89)

Loss= -0.03 (loss on exercise) + 0.02 (call premium) = -$0.01/unit