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John sold a put option on Euro for $.04 per unit. The strike price was $1.30, and the spot rate at the time the option was exercised was $1.27. Assume John immediately sold off the Euro received when the option was exercised. Also assume that there are 50,000 units in a Euro option. What was John’s net profit on the put option?

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estryzy

Answer:

$500

Explanation:

Put option on Euros sold for $0.04 per unit

This means that the premium he received per unit = $0.04

Spot rate at the time the option was exercised was $1.27

This means that the Amount per unit received from selling Euro = $1.27

Strike price was $1.30

This means that the amount per unit paid for Euro = $1.30

To calculate John's net profit for 50,000 units, we get

Net profit = 50,000 (Amount per unit received from selling Euro + premium received per unit - amount per unit paid for Euro)

= 50000 (0.04 + 1.27 - 1.30)

= 50,000 (0.01)

= $500

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