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ADMS 1000 Lecture Notes - Lecture 7: Foreign Exchange Spot, Call Option, Spot Contract

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blushweasel304
6 Jul 2018
School
York University
Department
Administrative Studies
Course
ADMS 1000
Professor
Alan Shapiro

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ADMS 1000 Full Course Notes
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ADMS 1000 Full Course Notes
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Document Summary

The owner of a currency put option has the right to sell a currency at a specified price (the strike price) within a specified period of time. The put option premium (denoted p) is primarily influenced by three factors, as the equation shows. P f s x ,t ,s . The relationships between the put option premium and these factors, which also influence call option premiums as described previously, are summarized. First, the spot rate of a currency relative to the strike price is important. A currency put option has the right to sell a currency at a specified price (the strike price) within a specified period of time. As with currency call options, the owner of a put option is not obligated to exercise the option. Therefore, the maximum potential loss to the owner of the put option is the price (or premium) paid for the option contract.

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Related Questions

A put option on yen is written with a strike price of ¥105.00/$. How much profit/loss will you make if you choose to exercise the option at ¥107.00/$?

A call option on euros is written with a strike price of $1.30/euro. How much profit/loss will you make if you choose to exercise the option at $1.45/euro?

A call option on UK pounds has a strike price of $2.05/£ and a cost of $0.02. What is the break-even price for the option?

Your U.S firm has an accounts payable denominated in UK pounds due in 6 months. What you should do by using currency options to protect yourself against unexpected changes in the dollar/pound exchange rate?

What will be your maximum gain and maximum loss in dollars, if you short a euro call option against dollar with strike price of $1.35/euro and at a premium of $0.07?

What will be your maximum gain and maximum loss, if you long a UK pounds put option with strike price of $1.80/£ and a cost of $0.7?

What will be your maximum gain and maximum loss, if you short a Japanese Yen put option with strike price of ¥103.00/$ and a cost of ¥10?

1. Answer the following questions regarding options: (1) A put option on yen is written with a strike price of ¥105.00/$. How much profit/loss will you make if you choose to exercise the option at ¥107.00/$? (2) A call option on euros is written with a strike price of $1.30/euro. How much profit/loss will you make if you choose to exercise the option at $1.45/euro? (3) A call option on UK pounds has a strike price of $2.05/£ and a cost of $0.02. What is the break-even price for the option? (4) Your U.S firm has an accounts payable denominated in UK pounds due in 6 months. What you should do by using currency options to protect yourself against unexpected changes in the dollar/pound exchange rate? (5) What will be your maximum gain and maximum loss in dollars, if you short a euro call option against dollar with strike price of $1.35/euro and at a premium of $0.07? (6) What will be your maximum gain and maximum loss, if you long a UK pounds put option with strike price of $1.80/£ and a cost of $0.7? (7) What will be your maximum gain and maximum loss, if you short a Japanese Yen put option with strike price of ¥103.00/$ and a cost of ¥10?

Assume you create a portfolio that consists of a long position in one 9 month call option and a short position in one 9 month put option on euros. Both the call and the put have 100,000 euros attached. The strike price for the call and put options is $1.3 and $1.4, respectively. The call and put premium is $.04 and $.03, respectively.

Calculate the profit/loss (in terms of USD) on your portfolio if the spot rate is .8 euros per dollar when the options expire. Round intermediate steps to four decimals and your final answer to two decimals. Do not use currency symbols or words when entering your response.