Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $.05 per unit. A pound option represents 31,250 units. Assume that at the time of the purchase, the spot rate of the pound is $1.51 and continually rises to $1.62 by the expiration date. The highest net profit possible for the speculator based on the information above is:
A) $1,562.50.
B) -$1,562.50.
C) -$1,250.00.
D) -$625.00.

Question

Quizplus · Accepted Answer

The premium of the option is $.05 × (31,250 units) = $1,562.50. Since the option will not be exercised, the net profit is -$1,562.50.

Assume That a Speculator Purchases a Put Option on British