A trader sells a put option at a premium of USD0.02. The put option requires him to buy AUD1 million at an exercise exchange rate of 0.9000 (USD/AUD). Calculate the trader's net profit on expiry, assuming the exchange rate is 0.9300 at expiry.
A) zero
B) +USD20,000
C) +AUD20,000
D) -USD20,000

Question

Quizplus · Accepted Answer

The trader receives a premium of USD0.02 per AUD1, so for AUD1 million, the premium received is USD0.02 x 1,000,000 = USD20,000. Since the exchange rate at expiry is higher than the exercise exchange rate, the put option will not be exercised, and the trader will keep the premium received. Therefore, the trader's net profit on expiry is USD20,000.

A Trader Sells a Put Option at a Premium of USD0.02