Today is the expiration day of a put option on the euro that you purchased two w
ID: 2821654 • Letter: T
Question
Today is the expiration day of a put option on the euro that you purchased two weeks ago when the spot rate was $1.1160/. The strike rate on the option is $1.0890/ and the premium was $0.0340/6 1. a. What were the intrinsic value and the time value of the put at the time of purchase? b. If today's spot rate is $1.0780/, would you exercise? How much would your payoff be (payoff is value of option position at expiration)? How much would your profit/loss be? Repeat part b above assuming today's spot rate is $1.0420/. At what expiration spot rate would you break even? c. d.Explanation / Answer
a. Intrinsic value of a put option = MAX (Strike Price - Spot Price OR 0)
Time value = premium - intrinsic value
from the data, Intrinsic value = MAX (1.0890 - 1.1160 OR 0) = MAX (-0.0270 OR 0) = 0
Time value = 0.034 - 0 = 0.0340
b. If todays spot rate is 1.0780, then intrinsic value = 0.011. Since Spot rate < Strike rate, we would exercise the option. The profit/(loss) would be = intrinsic value - premium = 0.011 - 0.034 = -0.023
Hence there will be a loss of $0.023/E
c. if spot rate were to be 1.0420 then intrinsic value = 0.047,
Since Spot rate < Strike rate, we would exercise the option. The profit/(loss) would be = intrinsic value - premium = 0.047 - 0.034 = 0.013
The profit would be $0.013/E
d. The break even point would be when spot rate were at $1.055/E