Question

​You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is:

Answer 1

The net profit per unit can be calculated by subtracting the spot rate of the Canadian dollar on the expiration date from the exercise price. In this case, the net profit per unit is $0.08.

Step-by-step explanation:

To calculate the net profit per unit, we need to consider the difference between the exercise price and the spot rate of the Canadian dollar on the expiration date.

Given that the premium received for selling the put option is $0.03 per unit, and the exercise price is $0.86, we can calculate the break-even point by subtracting the premium from the exercise price:

$0.86 - $0.03 = $0.83

If the spot rate of the Canadian dollar on the expiration date is less than $0.83, the put option will be exercised, resulting in a net profit of $0.86 - spot rate.

In this case, the spot rate is $0.78, so the net profit per unit is $0.86 - $0.78 = $0.08.

Answer 2

Answer: There will be a loss of $0.05 per unit

Step-by-step explanation:

The value of an option is simply the addition of its time value and also the intrinsic value. In this question, the following details has been given:

Exercise price = $0.86

Premium for option = $0.03

Spot Rate = $0.78

Here, there will be a loss which will be calculated by subtracting the spot price ane the premium option from the exercise price. This will be:

= $0.86 - $0.78 - $0.03

= $0.05

There will be a loss of $0.05 per unit.