A trader holds (or buys) a put option on the Hong Kong dollar
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A trader holds (or buys) a put option on the Hong Kong dollar

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?

Hint
Accounts & FinanceSpot exchange rate: It is the current price at which the person could exchange one currency for another, for the delivery on the earliest possible value date. Also, the cash delivery for spot currency transactions is usually the standard settlement date of two of the business days after the transaction date (T+2)....

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