Put Option

By Shrikanth Naik
Example
An Indian has to receive $100,000 after 60 days. spot rate is Rs. 64/$.
Indian expect rupees to appreciate and exchange rate come down to
Rs. 60/$.
he enter in to put option at strike price Rs.62 and Premium Rs. 1/$
Find out option price, If the market price after 60 days is a) Rs.60 b)
Rs.62 c) Rs. 64
Explain your decision in
1. In the money 2. out of money 3. at the money
Solution
Calculation of Option Price/ Cost of Option:
Strike price 62*$100,000 = Rs 62,00,000
less premium 1*$1,00,000 = Rs 1,00,000
total Price Rs 61,00,000
Option price = 61,00,000 = Rs 61/$.
1,00,000
Case 1: if market price Rs.60/$
market price is Rs 60*100,000 = 60,00,000
less premium Rs.1*100,000 = 100,000
net price receivable = 59,00,000
Market price = total price = 59,00,000 =Rs.59/$
units of $ 100,000
Option price is Rs.61 and open market price is Rs.59
Exporter money receivable from banker option price is RS.61/$ instead
of selling in open market Rs.59/$. In this case, strike rate is higher than
spot rate(market price). So it is in the money.
Case 2 : If market price is Rs.62/$
Market price is Rs. 62*100,000$ = 62,00,000
Less premium Rs. 1 *100,000$ = 100,000
Net receivable = 61,00,000
Market price = 61,00,000 = Rs.61/$
100,000
In this case, strike rate is equal spot rate(market price) it is called at the
Money. Therefor participant can sell in option market or open market.
In this case there is no loss or gain.
Case 3: if market price is Rs. 64/$
Strike price Rs. 64* 100,000 = 64,00,000
less premium 1*100,000 = 100,000
= 63,00,000
Market price = 63,00,000 = Rs.63/$
100,000
it is called out of money. Because strike rate (Rs.62) is less than spot
rate(market price).he cannot exercise his option. He sells in open
market(Rs.64).