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Chapter 5

Q. 5.ST.2

A put option on Australian dollars with a strike price of $.80 is purchased by a speculator for a premium of $.02. If the Australian dollar’s spot rate is $.74 on the expiration date, should the speculator exercise the option on this date or let the option expire? What is the net profit per unit to the speculator? What is the net profit per unit to the seller of this put option?

Step-by-Step

Verified Solution

The speculator should exercise the option.
The net profit to the speculator is $.04 per unit.
The net profit to the seller of the put option is -$.04 per unit.