Assume that a British pound put option has a premium of $.03 per unit and an exercise price of $1.60. The present spot rate is $1.61. The expected future spot rate on the expiration date is $1.52. The option will be exercised on this date, if at all. What is the expected per unit net gain (or loss)resulting from purchasing the put option?
A)$.01 loss
B)$.09 loss
C)$.09 gain
D)$.05 gain

Question

Assume that a British pound put option has a premium of $.03 per unit and an exercise price of $1.60. The present spot rate is $1.61. The expected future spot rate on the expiration date is $1.52. The option will be exercised on this date, if at all. What is the expected per unit net gain (or loss)resulting from purchasing the put option? ​
A)$.01 loss
B)$.09 loss
C)$.09 gain
D)$.05 gain

Quizplus · Accepted Answer

The expected net gain from purchasing the put option is calculated by considering the difference between the exercise price and the expected future spot rate, minus the premium paid for the option. Here, the exercise price is $1.60, and the expected future spot rate is $1.52, so the intrinsic value of the option at expiration would be $1.60 - $1.52 = $0.08. After subtracting the premium paid for the option, which is $0.03, the net gain is $0.08 - $0.03 = $0.05.

Assume That a British Pound Put Option Has a Premium