You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is:
A)-$.08.
B)-$.03.
C)$.05.
D)$.08.
E)none of the above

Question

Quizplus · Accepted Answer

The net profit per unit is calculated by subtracting the premium received from the difference between the exercise price and the spot rate, if the option is exercised. Since the spot rate ($.78) is below the exercise price ($.86), the option will be exercised. The profit per unit is the exercise price minus the spot rate ($.86 - $.78 = $.08) minus the premium paid ($.03), resulting in a net profit of $.05 per unit.

You Are a Speculator Who Sells a Put Option on Canadian