Question

A call option exists on British pounds with an exercise price of $1.70, a 90-day expiration date, and a premium of $.03 per unit. A put option exists on British pounds with an exercise price of $1.71, a 90-day expiration date, and a premium of $.035 per unit. You plan to purchase options to cover your future receivables of 300,000 pounds in 90 days. You will exercise the option in 90 days (if at all). You expect the spot rate of the pound to be $1.65 in 90 days. Determine the amount realized as a result of this transaction.

Answer 1

Receivables of pound in 90 days. Hence, a put option would be purchased on pounds to convert it into USD

Since the strike price is higher than the market price on maturity, the option will be exercised

Amount realised = (1.71-0.035)*300,000

= $502,500