A 6 month option on euro has excercise price of Rs 63 and is selling at Rs 120

Facts

Exercise Price/Strike Price (X) 1 Euro = Rs 63

Put Premium = Rs 0.90

Term = 6 months

Future Spot Price (FSP) 1 Euro = Rs 120

Answer

i. Pay off to Call and Put option holder

a) Put Option(Right to sell) holder has right to sell at Rs 63 to writer of put. Since in the open market euro will get Rs 120 holder will lapse the put option.

Payoff to Put Holder = (Rs 63- Rs120) - Rs 0.91 = - Rs 57.91

b) Call Option(Right to buy) holder has right to buy at Rs 63 from writer of call. Since in the open market euro cost Rs 120 holder will exrercise the call option.

Payoff to Call Holder = (Rs 120-Rs63) - Rs 0.91 = Rs 56.09

ii. Break Even FSP(BEFSP)

BEFSP of Put = X-premium=Rs 63-0.91 = Rs 62.09

BEFSP of Call = X+premium=Rs 63+0.91 = Rs 63.91

BEFSP is the FSP at which payoff to holder and writer of option is ZERO.

iii. Pay off to Call and Put option holder when FSP is Rs 61 and Rs 65

When FSP is Rs 61

a) Put Option(Right to sell) holder has right to sell at Rs 63 to writer of put. Since in the open market euro will get Rs 61 holder will exercise the put option.

Payoff to Put Holder = (Rs 63- Rs 61) - Rs 0.91 = Rs 1.09

b) Call Option(Right to buy) holder has right to buy at Rs 63 from writer of call. Since in the open market euro cost Rs 61 holder will lapse the call option.

Payoff to Call Holder = (Rs 61-Rs63) - Rs 0.91 = -Rs 2.91

When FSP is Rs 65

a) Put Option(Right to sell) holder has right to sell at Rs 63 to writer of put. Since in the open market euro will get Rs 65 holder will lapse the put option.

Payoff to Put Holder = (Rs 63- Rs 65) - Rs 0.91 = -Rs 2.91

b) Call Option(Right to buy) holder has right to buy at Rs 63 from writer of call. Since in the open market euro cost Rs 65 holder will lapse the call option.

Payoff to Call Holder = (Rs 65-Rs63) - Rs 0.91 = Rs 1.09