A put option exists on dollars with an exercise price of £0.55, a 90-day expiration date, and a premium of £0.02 per unit. You plan to purchase options to cover your future receivables of $700,000 pounds in 90 days. You will exercise the option in 90 days (if at all). You expect the spot rate of the dollar to be £0.54 in 90 days. Determine the amount of dollars to be received, after deducting payment for the option premium.
A) £406,000
B) £339,000
C) £364,000
D) £371,000
E) £385,000

Question

Quizplus · Accepted Answer

The option will not be exercised because the expected spot rate (£0.54) is less than the exercise price (£0.55). Therefore, the amount received will be based on the spot rate minus the premium cost: (0.54 * 700,000) - (0.02 * 700,000) = £371,000.

A Put Option Exists on Dollars with an Exercise Price