The spot rate of the New Zealand dollar is $0.70. A call option on New Zealand dollars with a one-year expiration date has an exercise price of $0.71 and a premium of $0.02. A put option on New Zealand dollars at the money with a one-year expiration date has a premium of $0.03. You expect that the New Zealand dollar’s spot rate will rise over time and will be $0.75 in one year. Today Jarrod purchased call options on New Zealand dollars with a one-year expiration date. Estimate the profit or loss per unit for Jarrod at the end of one year. (Assume that the options would be exercised on the expiration date or not at all.) Today Laurie sold put options on New Zealand dollars at the money with a one-year expiration date. Estimate the profit or loss per unit for Laurie at the end of one year. (Assume that the options would be exercised on the expiration date or not at all.)

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 5, Problem 4ST
Textbook Problem

The spot rate of the New Zealand dollar is $0.70. A call option on New Zealand dollars with a one-year expiration date has an exercise price of $0.71 and a premium of $0.02. A put option on New Zealand dollars at the money with a one-year expiration date has a premium of $0.03. You expect that the New Zealand dollar’s spot rate will rise over time and will be $0.75 in one year.

  1. Today Jarrod purchased call options on New Zealand dollars with a one-year expiration date. Estimate the profit or loss per unit for Jarrod at the end of one year. (Assume that the options would be exercised on the expiration date or not at all.)
  2. Today Laurie sold put options on New Zealand dollars at the money with a one-year expiration date. Estimate the profit or loss per unit for Laurie at the end of one year. (Assume that the options would be exercised on the expiration date or not at all.)

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