A speculator who tries to make a short-term gain on Forex trade bought a "put option" for $ 1,500 to transact EUR 1M @ 1.25, right after 30 days. However, on the date of maturity of the contract, in the open market, each EUR is worth $1.21.calculate the net gain/loss, if any , the speculator is going to earn/sustain on this arrangement
We are given,
Put option premium = $1,500
Spot rate = $1.25/euro
Amunt in $ = 1M*1.25 = $1.25M
Rate after 30 days = $1.21/euro
Amount to be paid in $ = 1M * 1.21 = 1.21M
The speculator bought the put option because he thought the $ will depreciate in relation to euro. But instead it appreciated and the rate after 30 days was $1.21/euro. Hence the put option expires worthless.
Speculator's
Gain = 1.25M - 1.21M = $40,000
Cost of put option = $1,500
Net Gain = 40,000 - 1,500 = $38,500
Hence the speculator will gain a net of $38,500.
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