Question

Exerc In July 2008, fearing further appreciation of the zloty, you bought a 3-month put option for 100,000 USD at 2 PLN/USD, paying premium 10 groszys for 1 USD. To cover the significant costs of this option, you wrote 3 month USD call options at 2 PLN/USD receiving premium 2 groszys for 1 USD. Draw your profit/loss profile What will be your profit/loss if the exchange rate in 3 months is 4 PLN/USD

Answer 1

		Premium paid for buying(Long) Put option per USD	0.1	PLN
		Premium received for writing(Short) Put option per USD	0.02	PLN
		Net Premium paid per USD	0.08	PLN
		Payoff for buying Put option at strike=2
		Exchange rate at settlement =S
		If S> or =2, Payoff =0
		If S<2, Payoff =(2-S)
		Payoff for Writing Call option at strike=2
		Exchange rate at settlement =S
		If S< or =2, Payoff =0
		If S>2, Payoff =(2-S)
		S	A	B	C=A+B-0.08	D=C*100000
		Exchange Rate at Settlement per USD	Payoff Long Put(PLN)	Payoff Short Call(PLN)	Net Profit/(Loss)in PLN per USD	Total Profit/(Loss) in PLN
		0.50	1.50	-	1.42	142,000
		1.00	1.00	-	0.92	92,000
		1.50	0.50	-	0.42	42,000
		2.00	-	-	(0.08)	(8,000)
		2.50	-	(0.50)	(0.58)	(58,000)
		3.00	-	(1.00)	(1.08)	(108,000)
		3.50	-	(1.50)	(1.58)	(158,000)
		4.00	-	(2.00)	(2.08)	(208,000)
		4.50	-	(2.50)	(2.58)	(258,000)
		5.00	-	(3.00)	(3.08)	(308,000)
		If the exchange rate is 4PLN/USD:
		Loss =208,000PLN	$52,000	USD
									Total Profit/(Loss) in PLN 200.000 150,000 100,000 50,000 2.00 1 00 3.00 4.00 5.00 6.00 (50,000) Total Profit/(Loss) in PLN (100,000) (150,000) (200,000) (250,000) (300,000) (350,000)