Use the following information for questions 14-15 The current spot rate is $.40/
ID: 2749093 • Letter: U
Question
Use the following information for questions 14-15 The current spot rate is $.40/SF. The 6-month forward rate is $.41/SF. A call option that expires in 6-months on 100,000 SF with a strike price of $.40/SF is selling for $1,900. A put option that expires in 6-months on 100,000 SF with a strike price of $.40/SF is selling for $100. Six months from now, the spot rate will be $.39/SF (this information is unknown right now, but I’m telling you).
14. If you entered into a contract to sell 100,000 SF in the forward contract, how much would you have made (lost)?
a. Lost $2,000
b. Lost $1,000
c. Made $1,000
d. Made $2,000
15. If you bought the put option, how much would you have made (or lost) including the original investment?
a. Lost $900
b. Lost $100
c. Made $900
d. Made $1,100
Explanation / Answer
14. If the contract was made to sell 100,000 SF in the forward contrat, the amount made (lost)=
c. made $1,000
Note :
6 month Forward rate= $0.41
Put Option = $ 0.40.
Thus profit = (Forward rate- put option rate) * (number of SF in the contract)
= $ (0.41-0.40)* (100000)
= $ 1000
15. If Put option was bought, the amount made (lost) including the original investment=
a. Lost $ 900
Note : Loss = (Option Rate- Actual Spot rate) * (number of SF in the contract) - option premium
= $(0.40-0.39) *(100000) - 100
= Loss $900