Problem 1
A trader holds (or buys) a put option on the Hong Kong dollar (HKD) at an exercise exchange rate (or strike price) of 0.1350 (USD/HKD). The size of the option contract is HKD 120,000. The premium is USD 0.005 per HKD.
(i) At which spot exchange rate on the expiration date will the trader break even?
(ii) Assume that the spot exchange rate on the expiration date is 0.1275 (USD/HKD). Calculate
the value of the option and the trader’s net profit?
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