Kenneth R. Szulczyk
Scenario 1: If the exchange rate exceeds $0.3 US per ringgit, then the investor exercises the
call option. For example, if the exchange rate equaled $0.4 US / ringgit, subsequently, the
ringgit appreciated while the U.S. dollar depreciated. Investor needs $1.8 million (0.3 × 6
million) to purchase the six million ringgits using the call option, or he or she pays $2.4 million
(0.4 × 6 million) if the investor buys the ringgits on the spot market. We calculated a
speculator's profit of $594,000 in Equation 8. Speculator can buy at the exercise price and sell
on the spot market.
ݐ݂݅ݎ=(ݐݏ ݁ܿ݅ݎ−݁ݏ݅ܿݎ݁ݔ݁ ݁ܿ݅ݎ)∙ݕݐ݅ݐ݊ܽݑݍ−݉ݑ݅݉݁ݎ (8)
ݐ݂݅ݎ=ቀ.ସ
௧−
.ଷ
௧ቁ∙^6 ,^000 ,^000 ݏݐ݅݃݃݊݅ݎ−$6,^000 =$594,^000
Scenario 2: If the exchange rate drops lower than $0.3 US / ringgit, then the investor does
not exercise the call option. For instance, if the exchange rate equals $0.2 US / ringgit,
subsequently, the ringgit depreciated while the U.S. dollar appreciated. Investor pays $1.2
million for the six million ringgit (0.2 × 6 million), or he or she could exercise the call option
and pay $1.8 million (0.3 × 6 million). Thus, this investor would not exercise the call option, but
a speculator would earn a loss, which equals the premium.
Example 4: An investor has U.S. dollars and wants to sell 500 thousand euros using a
European put option. Strike price is $0.8 US / euro. Premium equals $0.02 US per euro while
the contract size is 25,000 euros. Investor needs 20 contracts and pays $20,000 for the premium,
calculated in Equation 9. Investor needs 20 contracts.
500000 € 10000
€
0.02
, =$ ,
$
premium (9)Investor observes two scenarios on the expiration date:
Scenario 1: If the exchange rate exceeds $0.8 US / euro, then the investors do not exercise
the put option. Euro appreciated while the U.S. depreciated. For example, if the exchange rate
rises to $0.9 US / euro, subsequently, the investors sell 500,000 euros for $450,000 on the spot
market. Investors could sell those same euros for $400,000 if they had exercised the option.
Thus, the investors do not use the put option. Speculators would earn a loss, equaling the
option's premium.
Scenario 2: If the exchange rate drops lower than $0.8 US / euro, then the investor
exercises the put option. For instance, if the exchange rate is $ 0 .7 US / euro, subsequently, the
investor sells the 500,000 euros for $400,000 by exercising the put option. Instead, if the
investors sell the euros on the spot market, they receive $350,000 for those same euros. Thus,
investors exercise put option. Speculators would earn $40,000 in profits that we calculated in
Equation 10.
ݐ݂݅ݎ=(݁ݏ݅ܿݎ݁ݔ݁ ݁ܿ݅ݎ−ݐݏ ݁ܿ݅ݎ)∙ݐ݊ܽݑݍ݅ݕݐ−݉ݑ݅݉݁ݎ (10)
ݐ݂݅ݎ=ቀ