chapter 5

FX Options: Concepts

LEARNING OBJECTIVES

This chapter introduces readers to the basic concepts of foreign exchange (FX) options with detailed illustrations. Reading and analysis of the extensive illustrations provided in this chapter is essential for all those who are new to the world of options. The contents of this chapter are organized in the following order:

 

1. What Is an Option?

2. Option Definitions (From Currency Perspective)

3. Basics of Option

4. Option Payoff

5. Payoff Diagrams

INTRODUCTION

As discussed in Chapter 3, hedging is like ‘securing a rate or freezing a certain rate for foreign currency receivable/ payable’. Once a person has hedged his exposure at a particular price, any subsequent rise or fall in exchange rate would have no impact on the person’s cash flows they have been crystallized. The illustration already discussed earlier in Chapter 3 has been provided in Table 5.1 to elaborate further on the same.

 

As can be seen from Table 5.1, the reference rate was INR 45 in June 07.

Assuming that the person had hedged his exposure, subsequent movement in USD/INR exchange rate would have following impact:

In January 08, when USD/INR exchange rate had reached 39.27, then an importer would have been sad because of opportunity loss, and exporter would have been delighted since his decision to hedge had proved correct.

In August 09, when USD/INR exchange rate had reached 52.85, then the importer would have been happy since decision to hedge had proved correct and exporter would have been sad due to opportunity loss.

At inception, both exporter and importer seek to hedge their exposure to protect themselves from adverse market movements. However, they would definitely have preference for a technique or product through which, not only they could hedge their exposure, but also participate in favourable market movements. This led to emergence of a product known as options, whereby paying a defined sum of money known as premium, one could get insurance against adverse market movements, but with full participation in case of favourable market movement. Thus, by hedging their exposure through an option, the importer and exporter would always be happy, irrespective of any subsequent exchange rate movements. However, they would have to pay option premium to purchase this.

WHAT IS AN OPTION?

In financial terms, option could be described as a ‘contract between two parties in which one party has the right but not the obligation, to do something; usually to buy or sell some underlying asset’.

The option could be either a call option or a put option.

Call options are contracts giving the option holder the right to buy something while put options entitle the holder to sell something. Payment for call and put options takes the form of a flat, up-front sum called a premium.

OPTION DEFINITIONS (FROM CURRENCY PERSPECTIVE)

• Option buyer has the right but not the obligation.
  • To buy (Call) or sell (Put) a specified amount of a currency.
  • At a pre-agreed price (Strike or Exercise Price).
  • Either during (American) or at the end (European) of a specified period (Maturity or Expiry Date).
• Option buyer
  • Will only exercise the option if beneficial at expiry (i.e. in-the-money).
  • Pays a premium for option to seller, usually upfront.
• Option seller
  • The seller (or ‘writer’) has the obligation to buy or sell the asset if the owner of the option exercises it.
  • After receipt of premium.

BASICS OF OPTION

The following table provides an interpretation of an option, both call and put from a buyer’s perspective:

Nature of option	Exposure	Description of right	Illustration
Buy call option on underlying	Importer of underlying	Right to buy underlying	Buy USD call means right to buy USD at a specific strike or exercise price.
Buy put option on underlying	Exporter of underlying	Right to sell underlying	Buy USD put means right to sell USD at a specific strike or exercise price.

Similarly the seller of the option, whether call or put, can be explained in the following table:

Nature of option	Exposure	Description of obligation	Illustration
Sell call option on underlying	Exporter of underlying	Obligation to sell underlying	Sell USD call means obligation to sell USD at a specific strike or exercise price.
Sell put option on underlying	Importer of underlying	Obligation to buy underlying	Sell USD put means obligation to buy USD at a specific strike or exercise price.

IMPORTANT NOTES

1. Strike price or exercise price means the pre-agreed price as part of an option contract at which right would be exercised and obligation would be discharged.

   Example: Buy USD put against INR at 45 for maturity 31 December 2011 would mean a right to sell USD at 45. Similarly, buy USD call against INR for maturity 31 December 2011 would mean a right to buy USD at 45.

2. The buyer of the option pays premium to buy the right. Hence, the maximum loss to buyer can be premium paid by him.
3. The seller of the option receives premium. Hence, the maximum gain to him can only be the option premium received.
4. Theoretically, the calculation of the option premium is different from calculation of forward premium. While forward premium/discount is calculated through interest rate parity theorem, the option premium is calculated through various valuation/pricing models which has been discussed subsequently in this book.
5. Concept of American and European options:

   American options: American Options are those options which can be exercised at any time till the maturity of the option contract.

   Example: Buy American USD put against INR at 45 for maturity 31 December 2011 can be exercised at any time until 31 December 2011.

   European options: European option are those options which can only be exercised at the time of maturity of option contract.

   Example: Buy European USD put against INR at 45 for maturity 31 December 2011 can be exercised only on 31 December 2011.

6. Concept of In the Money (ITM), At the Money (ATM) and Out of the Money (OTM)
   

   FRR = Forward Reference Rate.

OPTION PAYOFF

• Suppose one needs to buy GBP/sell USD for delivery in two months’ time.

  Either

  • He buys GBP today at the forward rate and take delivery on the forward date (This is an obligation).
    or
  • He buys the option to receive GBP against USD in two months’ time (This provides buyer with flexibility, choice, participation in favourable currency movement and payoff is asymmetric).

PAYOFF DIAGRAMS

Buy Put

Breakeven rate for the buyer of a put will be equal to the strike price minus the premium of the option.

Sell Call

The breakeven rate for the seller of a call will be equal to the strike price plus the premium of the option.

Buy Call

The breakeven rate for the buyer of a call will be equal to the strike price plus the premium of the option.

Sell Put

The breakeven rate for the seller of a put will be equal to the strike price minus the premium of the option.

MISCELLANEOUS ILLUSTRATIONS

ILLUSTRATION 1

1. What does buying a call option signify and how is the value of a call option calculated on maturity date?
2. What does buying a put option signify and how is the value of put option calculated on maturity date?

Solution

1. Buying a call option: The buyer of call option has right to exercise the options and purchase the underlying assets at an exercise price (strike price) on expiration date for delivery on settlement date. The buyer of call option would exercise the right in case the market price of underlying asset is more than the strike price of underlying in the option.

   Value of Call Option on Maturity Date = Higher of [0, {Market Price at Expiration day − Exercise Price}]

    

   Profit/Loss for buyer of Call option on Maturity Date = Higher of [0, {Market Price at Expiration day − Exercise Price}] − Option premium paid

   Example: Suppose A Ltd. buys a GBP call INR put option at an exercise price of INR 75 by paying premium of INR 20. Find the value of option if on maturity of the option on 20 April, the market price of GBP/INR = INR 90 or INR 75 or INR 70.

   Solution: Value of a call = {Market Price at Expiration day − Exercise Price}

   Note: If the above calculated value results into negative, then it is taken as zero.

    

   Table 5.2 Scenario Analysis and Payoff Profile

   

   If the market price on expiry date is INR 70, the value of option on expiry date is 0. The buyer of a call option has right to buy assets. If price of asset is INR 70, he will buy the asset in the market at INR 70 without exercising the option.

   In case market price of underlying is INR 90 on maturity date, he may exercise the option and buy the underlying from the seller of the call at INR 75 in case of gross settlement or alternatively he may receive INR 15 in case of net settlement of option.

   Note: The premium paid initially is a sunk cost in all the above scenarios. It is only considered for the calculation of final profit or loss.

2. Buying a put option: It provides the buyer of option the right to sell the underlying asset at strike price on expiration date. The buyer of the option exercises the right if market price of underlying asset is less than the exercise price the option.

   Value of Put Option for buyer on maturity date = Higher of [0, {Exercise Price − Market price at Expiration day}]

   Profit/Loss for buyer of Put option on maturity date = Higher of [0, {Exercise Price − Market price at Expiration day}] – Option premium paid

   Example: Suppose A Ltd. purchases a GBP put INR call option with an exercise price of INR 95 by paying a premium of INR 20. Find the value of option if on maturity date on 20 April, the market price of underlying GBP/INR is INR 120 or INR 95 or INR 65.

   Solution: Value of put option on maturity date = {Exercise Price − Market price at Expiration day}

   Note: If the above calculated value results into negative, then it is taken as zero.

    

   Table 5.3 Scenario Analysis and Payoff Profile

   

   If the market price of GBP/INR on maturity is INR 120, the value of option is 0. The buyer of put option has right to sell the underlying. If price of underlying is INR 120, he would sell the asset in the market at INR 120 without exercising the option.

   When the price of the underlying is INR 65, he may exercise the option and deliver the asset to the seller of the put at INR 95 or alternatively he may receive INR 30 as net settlement.

   Note: The premium paid initially is a sunk cost in all the above scenarios. It is only considered for the calculation of final profit or loss.

ILLUSTRATION 2

An exporter has bought USD put INR call at 45 (strike price) by paying a premium of INR 1 per USD instead of taking a forward at 45 for maturity 31 December 2011. You are required to answer the following:

1. When does the option get exercised?
2. Compare the option as against forward reference rate. Also calculate the profit/loss on such options by comparing it against forward.
3. Is the option ATM, ITM or OTM?
4. In case the strike price of the put option had been less than 45, what would the option be termed as based on its moneyness?
5. In case the strike price of the put option had been greater 45, what would the option be termed as based on its moneyness?
6. What are the various methods to compute premium on option?
7. What is the underlying reason for a client buying a USD put INR call option?
8. What is the maximum loss or outflow for the buyer/holder of an option?
9. What can be the maximum profit or inflow for the buyer/holder of an option?

Solution

The options would get exercised when the market rate on expiry date is below 45.

FRR = Forward Reference Rate

ATM option:	If Strike Price (SP) or Exercise price = FRR
ITM option:	Exporter: SP>FRR Importer: SP<FRR
OTM option:	Exporter: SP<FRR Importer: SP>FRR

1. Table 5.4 Scenario Analysis and Payoff Profile

   

2. Table 5.5 Scenario Analysis and Payoff Profile

   
3. Since the strike price of the put option is equal to forward reference rate, such option is termed as ‘At the Money Option’.
4. Since the strike price of the put option is less than forward reference rate, such option is termed as ‘Out the Money Option’.
5. Since the strike price of the put option is more than forward reference rate, such option is termed as ‘In the Money Option’.
6. The three primarily used models to calculate option premium are binomial model, risk neutralization model and Black Scholes model.
7. The client wants an insurance against INR appreciation. But in case of a favourable move, he wants to participate and gain unlike forwards.
8. The maximum loss or outflow of the buyer of the vanilla option is the premium paid for buying an option.
9. The maximum profit or inflow of the buyer of the vanilla option is unlimited.

ILLUSTRATION 3

An importer has bought USD call INR put at 45 (strike price) by paying a premium of INR 1 per USD instead of taking a forward at 45 for maturity 31 December 2012. You are required to answer the following:

1. When does the option get exercised?
2. Compare the option as against FRR. Also calculate the profit/loss on such option by comparing it against forward.
3. Is the option ATM, ITM or OTM?
4. In case the strike price of the call had been less than 45, what would the option be termed as based on its moneyness?
5. In case the strike price of the call option had been greater than 45, what would the option be termed as based on its moneyness?
6. What are the various methods to compute premium on option?
7. What is the underlying reason for a client buying a USD Call INR put option?
8. What is the maximum loss or outflow for the buyer/holder of an option?
9. What can be the maximum profit or inflow for the buyer/holder of an option?

Solution

1. Table 5.6 Scenario Analysis and Payoff Profile

   

2. Table 5.7 Scenario Analysis and Payoff Profile

   
3. Since the strike price of the call option is equal to FRR, such option is termed as ‘At the Money Option’.
4. Since the strike price of the call Option is less than FRR, such option is termed as ‘In the Money Option’.
5. Since the strike price of the call option is more than FRR, such option is termed as ‘Out the Money Option’.
6. Premium on options are calculated through binomial model, risk neutralization model and Black Scholes model.
7. The client wants an insurance against INR depreciation. But, in case of favourable move, he wants to participate and gain unlike forwards.
8. The maximum loss or outflow of the buyer of the vanilla option is the premium paid for holding an option.
9. The maximum profit or inflow of the buyer of the vanilla option is unlimited.

ILLUSTRATION 4

Assume that FRR for maturity on 31 December 2011 is INR 45 for USD/INR currency pair; plot the exercisability of the following European option for maturity on 31 December 2011 by taking some random market rates on the date of maturity/expiry of the hedging contract:

1. Buy USD put at INR 45 (ATM Option)—premium paid upfront INR 1.
2. Buy USD put at INR 46 (ITM Option)—premium paid upfront INR 2.
3. Buy USD put at INR 44 (OTM Option)—premium paid upfront INR 0.50.
4. Buy USD call at INR 45 (ATM Option)—premium paid upfront INR 1.
5. Buy USD call at INR 44 (ITM Option)—premium paid upfront INR 2.
6. Buy USD call at INR 46 (OTM Option)—premium paid upfront INR 0.50.

Solution

Note: A tick mark represents that client would exercise his option while cross represents he would buy or sell in market instead of exercising the option.

Note: In case the client has taken an option, whether the option gets exercised or not, premium is paid upfront and is a sunk cost.

Note: Premium is ignored while checking the exercisability of an option.

ILLUSTRATION 5

Assume that FRR rate for maturity on 31 December 2011 is INR 45 for USD/INR currency pair; plot the exercisability of the following European option for maturity on 31 December 2011 by taking some random market rates on the date of maturity/expiry of the hedging contract:

1. Sell USD put at INR 45 (ATM Option)—premium received upfront INR 1.
2. Sell USD put at INR 46 (ITM Option)—premium received upfront INR 2.
3. Sell USD put at INR 44 (OTM Option)—premium received upfront INR 0.50.
4. Sell USD call at INR 45 (ATM Option)—premium received upfront INR 1.
5. Sell USD call at INR 44 (ITM Option)—premium received upfront INR 2.
6. Sell USD call at INR 46 (OTM Option)—premium received upfront INR 0.50.

Solution

Note: In case of Sell Put and Sell Call options, whether the option will be exercised or not is found out by taking the viewpoint of the counterparty who holds the corresponding Buy Put and Buy Call options.

Thus, if buyer of an option exercises his right then seller of the option shall have the obligation to honour the same.

This is shown in Table 5.12.

 

ILLUSTRATION 6

Assume that FRR for maturity on 31 December 2011 is INR 45 for USD/INR currency pair; plot the exercisability and payoff matrix of the following European options for maturity on 31 December 2011 by taking some random market rates on the date of maturity/expiry of the hedging contract:

1. Buy USD put at INR 45 (ATM Option)—premium paid upfront INR 1.
2. Buy USD put at INR 46 (ITM Option)—premium paid upfront INR 2.
3. Buy USD put at INR 44 (OTM Option)—premium paid upfront INR 0.50.

Solution

In order to calculate the profit and loss option, it is not necessary to compare it against forward. However, people do tend to compare it against forward for the sake of simplicity and comfort.

 

ILLUSTRATION 7

Assume that FRR for maturity on 31 December 2011 is INR 45 for USD/INR currency pair; plot the exercisability and payoff matrix of the following European options for maturity on 31 December 2011 by taking some random market rates on the date of maturity/expiry of the hedging contract:

1. Buy USD call at INR 45 (ATM Option)—premium paid upfront INR 1.
2. Buy USD call at INR 44 (ITM Option)—premium paid upfront INR 2.
3. Buy USD call at INR 46 (OTM Option)—premium paid upfront INR 0.50.

Solution

In order to calculate the profit and loss on option, it is not necessary to compare it against forward. However, people do tend to compare it against forward for the sake of simplicity and comfort.

 

ILLUSTRATION 8

Assume that FRR for maturity 31 December 2011 is INR 45 for USD/INR currency pair; plot the exercisability and payoff matrix of the following European Options for maturity on 31 December 2011 by taking some random market rates on the date of maturity/expiry of the hedging contract:

1. Sell USD put at INR 45 (ATM Option)—premium received upfront INR 1.
2. Sell USD put at INR 46 (ITM Option)—premium received upfront INR 2.
3. Sell USD put at INR 44 (OTM Option)—premium received upfront INR 0.50.

Solution

In order to calculate the profit and loss on option, it is not necessary to compare it against forward. However, people do tend to compare it against forward for the sake of simplicity and comfort.

 

ILLUSTRATION 9

Assume that FRR for maturity on 31 December 2011 is INR 45 for USD/INR currency pair; plot the exercisability and payoff matrix of the following European options for maturity on 31 December 2011 by taking some random market rates on the date of maturity/expiry of the hedging contract:

1. Sell USD call at INR 45 (ATM Option)—premium received upfront INR 1.
2. Sell USD call at INR 44 (ITM Option)—premium received upfront INR 2.
3. Sell USD call at INR 46 (OTM Option)—premium received upfront INR 0.50.

Solution

In order to calculate the profit and loss on option, it is not necessary to compare it against forward. However, people do tend to compare it against forward for the sake of simplicity and comfort.

 

ILLUSTRATION 10

Find the profit/ loss for the buyer of the call for the following cases:

Shares	Market price (Spot) at expiration	Exercise price (Strike price)	Premium paid
A	15	12	1
B	27	26	2
C	21	23	2
D	40	35	2
E	23	25	1

Also find the value of the option.

Solution

Value of a call option at maturity = {Market Price at Expiration day − Exercise Price}

Note: The premium paid initially is lost in all the cases. It is only considered for the calculation of final profit or loss and in the above case the profit and loss has been calculated by comparing the option against the market rate at expiration date instead of FRR.

ILLUSTRATION 11

Find profit/loss to the buyer of a put.

Shares	Market price (Spot) at expiration	Exercise price	Premium paid
A	10	15	3
B	14	16	3
C	19	20	4
D	15	14	1
E	20	20	3
F	23	25	3

Solution

ILLUSTRATION 12

A six months call option on USD/INR is available at an exercise price of INR 48. Expected price of USD/INR along with the probability is as follows:

Expected rate	40	45	50	55	70
Probability	0.20	0.30	0.10	0.30	0.10

1. Find the expected value of USD/INR at six months maturity by considering probabilities of each of the expected USD/INR rates.
2. Value of call at six months maturity if the above expected rate of USD/INR becomes a reality in market.
3. Find the value of call at six months. What is its current value if interest rate is 0 per cent and 20 per cent p.a.?

Solution

1. Estimated price of at six months

   = sum of (price × probability)

   = {(40 × 0.20) + (45 × 0.30) + (50 × 0.10) + (55 × 0.30) + (70 × 0.10)}

   = 8 + 13.5 + 5 + 16.5 + 7

   Overall Estimated Price of USD/INR = INR 50

2. If the spot price at six months is equal to the estimated price INR 50, then

   Value of a call = Market price − Exercise price

   = 50 − 48 = INR 2
3. Value of a call at expiration date:

 

Value of call at six months = 4.50

Current Value = Expiration Date Value/(1 + PIR)

If the interest rate is 0 per cent or not given in question, then

Current value of a call = 4.50/ (1 + 0) = INR 4.50

If the interest rate is 20 per cent p.a. then

Current value of a call = 4.50/{1 + (0.20 × 6/12)}

ILLUSTRATION 13

You are planning to buy a call option with the strike price of INR 24 per CHF. On the date of maturity, probability profile of spot rate is expected to be:

Probability	0.20	0.30	0.30	0.20
Exchange rate	21.00	23.00	25.00	27.00

What should be the option premium to enable you to break even?

Solution

Breakeven = No profit / no loss

Actual price of option (actual premium) = fair price of option

Calculation of value of a call

 

Value of a call at expiration date = 0.90.

The interest rate is not given.

Current Value = Expiration Date Value/(1 + PIR).

Fair value of option = 0.90.

If actual call premium is 0.90 then one would be breakeven.

ILLUSTRATION 14

A company has a receivable of USD 100 million in three months. A bank has offered him a put option with the exercise price INR 37/USD. The premium payable is INR 1/USD. The probability of exchange rate after three months is as follows:

Probability	0.20	0.30	0.30	0.20
Exchange rate	35.00	35.50	36.00	36.50

In your opinion, should the company purchase put option?

Solution

Calculation of the value of put

 

Value of put = 1.25

Fair value of a put for USD 1 = INR 1.25

(Calculated value of a put premium)

Actual premium quoted = INR 1

Actual price is lower so the put should be purchased

ILLUSTRATION 15

The TORA stock is selling at INR 5,000. Mr. X has a negative view about the stock. He decides to take advantage of the situation through options. He buys an option from exchange which will entitle him to sell one share on or before 30 December at INR 4,500 per share for which he has to pay INR 200 per share today. Identify type of option, exercise price, expiry date, option premium, buyer of the option, writer of the option, and underlying asset current market price.

Solution

Type of option	American put option
Exercise price	INR 4,500 per share
Expiry date	30 December
Option premium	INR 2,000 (200 × 10)
Put buyer (Buy put)	Mr. X
Put Writer (Sell put)	Exchange
Underlying asset	TORA Shares
Current market price	INR 5,000

ILLUSTRATION 16

The shares of BETA power are selling at INR 104 per share. Amit wants to chip in with buying call option at a premium of INR 5 per option. Exercise price is INR 105. Six possible prices per share on expiration date range from 95 to 120, with intervals INR 5 are possible.

1. What is Amit’s payoff as option holder (Buy Call Party) at expiration?
2. What is the call writer (Sell Call party) payoff on expiration?

Solution

1. Payoff table for CALL BUYER (Table 5.19)

    

   Table 5.19 Scenario Analysis and Payoff Profile

   

   Additional analysis: Call option buyer can never have loss more than premium paid

   Important note: Call option buyer has limited loss but unlimited profit participation.

2. Payoff table for CALL writer (Table 5.20)

 

Additional analysis: Call option seller can never have profit more than the amount of premium received.

Important note: Call option writer has limited profit but unlimited loss

ILLUSTRATION 17

An investor buys a call option on a share at a strike price of INR 30 for a premium of INR 6. The current market price of share is INR 28. Find out the profit/loss for the investor if the market price of the share is INR 18, INR 26, INR 28, INR 31 or INR 32, on the expiration date. What will be his payoff in case he buys the put option?

Solution

In case the investor takes Buy Call option

 

In case the investor takes Buy Put option

 

TEST YOUR UNDERSTANDING

1. 1. Determine the value of call option and status at expiration date

      Share	A	B	C	D	E
      Market price	10	25	35	48	07
      Exercise price	12	21	35	52	05

   2. For the following put option determine the value of option and status at expiration date

      At expiration date	A	B	C	D	E
      Market price	12	27	30	46	09
      Exercise price	14	23	30	50	07

2. A six months call option on a share has an exercise price of INR 38 along with the probability and price at the expiration date as follows:

   Probabilities	0.10	0.25	0.30	0.25	0.10
   Price of share	30	36	40	44	50

   What is the expected price of the share after six months? What is the value of option? What is the value of option assuming interest rate to be 12 per cent p.a.? What is the value of option assuming interest rate to be 12 per cent p.a. continuously compounding?

3. The November option on RST Ltd. Stock at a strike price of INR 105 is available at a call option price of INR 5. The price of the stock today is INR 140. A range of prices beginning from 95 and ending with 125 with the interval of five is possible as at the expiry date.
   1. What is the payoff for the call holder on expiration?
   2. Draw a payoff graph.
   3. What is the call writer’s payoff on expiration?
   4. Draw a payoff table and a payoff graph.
4. An exporter has bought EUR put INR call at 65 (strike price) by paying a premium of INR 1 per EUR instead of taking a forward of 65 for maturity on 31 December 2012. You are required to answer the following:
   1. When does the option get exercised?
   2. Compare the option as against FRR. Also calculate the profit/loss on such option by comparing it against forward.
   3. Is the option ATM, ITM or OTM?
   4. In case the strike price of the put option had been less than 65, what would the option be termed as based on its moneyness?
   5. In case the strike price of the put option had been greater than 65, what would the option be termed as based on its moneyness?
   6. What are the various methods to compute premium on option?
   7. What is the underlying reason for client buying a EUR Put INR Call option?
   8. What is the maximum loss or outflow for the buyer/holder of an option?
   9. What can be the maximum profit or inflow for the buyer/holder of an option?
5. An Importer has bought Euro Call INR Put at strike price of 65 by paying a premium of INR 1 per EUR instead of taking a forward of INR 65 for maturity on 31 December 2012. You are required to answer the following:
   1. When does the option get exercised?
   2. Compare the option as against FRR. Also calculate the profit/loss on such option by comparing it against forward.
   3. Is the option ATM, ITM or OTM?
   4. In case the strike price of the call option had been less than 65, what would the option be termed as based on its moneyness?
   5. In case the strike price of the Put Option had been greater 65, what would the option be termed as based on its moneyness?
   6. What are the various methods to compute premium on option?
   7. What is the underlying reason for client buying a EUR Call INR Put option?
   8. What is the maximum loss or outflow for the buyer/holder of an option?
   9. What can be the maximum profit or inflow for the buyer/holder of an option?
6. Assume that FRR for maturity on 31 December 2011 is INR 65 for EUR/INR currency pair; plot the exercisability of the following European option for maturity on 31 December 2011 by taking some random market rates on the date of maturity/expiry of the hedging contract:
   1. Buy EUR put at INR 65 (ATM Option)—premium paid upfront INR 1
   2. Buy EUR put at INR 66 (ITM Option)—premium paid upfront INR 2
   3. Buy EUR put at INR 64 (OTM Option)—premium paid upfront INR 0.50
   4. Buy EUR call at INR 65 (ATM Option)—premium paid upfront INR 1
   5. Buy EUR call at INR 64 (ITM Option)—premium paid upfront INR 2
   6. Buy EUR call at INR 66 (OTM Option)—premium paid upfront INR 0.50