Answer to Question #224502 in Financial Math for Amoa

Question

Caleb sold a put option on Canadian dollars for $.05 per unit. The strike price was $.85,
and the spot rate at the time the option was exercised was $.92. Assume Caleb
immediately sold off the Canadian dollars received when the option was exercised. Also
assume that there are 50,000 units in a Canadian dollar option. What was Caleb’s net
profit on the put option?

Answer 1

The holder of the call option, whoever Caleb has sold the option to will exercise it if $S-X\geq0$, otherwise he/she will let the option expire.

In this case,

$S-X=\$0.92-\$0.85=\$0.07\ge0$so the holder of the option will exercise it. In that case,the option sellers' Caleb net profit per unit of Canadian dollar is calculated as follows:

Net profit per C$\$=$ selling price of currency-Buying price of currency+premium on the option.

$=0.92-0.85+0.07=0.14$

Since each option contract contains 50000units of Canadian dollars, Net profit per option$=50000 units×0.14 =\$7000$