From the perspective of the writer of a put option written on €62,500. If the strike price is $1.55/€, and the option premium is $1,875, at what exchange rate do you start to lose money?
A)$1.52/€
B)$1.55/€
C)$1.58/€
D)None of the above

Question

Quizplus · Accepted Answer

To calculate the break-even exchange rate for the writer of the put option, we need to subtract the premium from the strike price and then divide by the premium.

Breakeven exchange rate = (Strike price - Premium)/Premium

Breakeven exchange rate = (€62,500 x $1.55/€ - $1,875)/$1,875

Breakeven exchange rate = $96,875/$1,875

Breakeven exchange rate = $51.67/€

Therefore, the writer of the put option will start losing money if the exchange rate falls below $1.52/€ (which is below the breakeven exchange rate of $51.67/€). So the correct choice is A.

From the Perspective of the Writer of a Put Option