Illustration :
An exporter, exporting garments to USA is supposed to receive his payments in USD (US Dollar) for the goods exported and thus is affected by depreciation or weakness in Rupee. Thus the exporter buys Put Option to cover his transaction on 1st October 2010 at a Strike Rate or 45.50. The expiry is 2 months hence, i.e. 30th December 2010. The premium for the call option is 0.30 paise. So at the time of making the actual payment if the spot price has moved above the Strike Price, the dollar becomes costlier and the loss on Call Option is maximum upto 0.30 paise. If at the time of making the actual payment, the spot price has moved below Strike Price, the Dollar becomes cheaper but the loss is compensated by an appreciation in the Premium Price.
Payoff Table depicting gains and losses at various levels of exchange rate –
| SPOT RATE | EXERCISE RATE | PREMIUM PAID | GAIN/LOSS |
| CALL@45.50 | |||
| 44.00 | 1.50 | 0.30 | 1.20 |
| 44.50 | 1.00 | 0.30 | 0.70 |
| 45.00 | 0.50 | 0.30 | 0.20 |
| 45.50 | 0.30 | -0.30 | |
| 46.00 | 0.30 | -0.30 | |
| 46.50 | 0.30 | -0.30 | |
| 47.00 | 0.30 | -0.30 |
SMEs/Corporate Advisory Desk at Ludhiana - Indo Pak International Expo 2013 from 15th – 18th February 2013 in Ludhiana, Punjab
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