Since we choose not to exercise the put option the

Since we choose not to exercise the put option, the loss on the put option is only the
premium we paid: $0.01/S$ X S$1,000,000 = $10,000 USD Loss on the put option
(2) Recalculate the gain/loss on each of these option contracts if the spot turn on June 18,
2016 turns out to be $0.45 USD per Singapore dollar.

We will sell the S$1,000,000 through the put option and receive USD payment. We
expect to receive:
($0.55/S$ - $0.01/S$) X S$1,000,000 = $540,000 USD
Without the put option, we have to sell the Singapore dollar in the market and we will
only receive: ($0.45/S$) X S$1,000,000 = $450,000 USD.
Thus, we gain $90,000 in the put option.
Alternatively, just calculate the gain by using the formula: (X- St – premium) X contract
size for a long position in the put option = (0.55 – 0.45 – 0.01) X 1,000,000 = $90,000
gain
(3) If your firm has a subsidiary firm in Singapore and your firm expects to receive
S$1,000,000 Singapore dollar earnings remitted from the subsidiary three months later
(in June 2016). Which option contract can help you hedge the foreign exchange rate risk
in converting the Singapore dollar into the US dollar?
(4) Draw a payoff diagram for a long position in the call option and a long position in the put
option respectively. On the diagram, show the strike price, breakeven price and the
premium cost for each option contract.