Assume that a speculator purchases a put option on dollars (with a strike price of £0.84) for £0.03 per unit. A dollar option represents 50,000 units. Assume that at the time of the purchase, the spot rate of the dollar is £0.85 and continually rises to £0.88 by the expiration date. The highest net profit possible for the speculator based on the information above is:
A) £1,500.
B) -£1,500.
C) -£0.
D) -£3,000.

Question

Quizplus · Accepted Answer

The put option allows the speculator to sell dollars at £0.84, but since the spot rate rises to £0.88, the option will not be exercised. The speculator loses the premium paid, which is £0.03 per unit for 50,000 units, resulting in a total loss of £1,500.

Assume That a Speculator Purchases a Put Option on Dollars