Can I buy a USD-INR put option if I am bearish on the US dollar i.e. I expect the dollar to weaken from current levels?
Answer
Answer
Of course, you can buy a put option on the USD INR contract. Your cost will be limited to the premium paid but your profits can be unlimited on the down side once the premium cost is covered. Check the table below:
Strike
72.00
Prem
0.50
Buy Put Option
Break Even
Below 71.50
Price
Strike
Premium
Profit/Loss
ITM/OTM
Option Value
Net Profit (Value-Prem)
68.00
72.00
0.50
4.00
ITM
4.00
3.50
68.50
72.00
0.50
3.50
ITM
3.50
3.00
69.00
72.00
0.50
3.00
ITM
3.00
2.50
69.50
72.00
0.50
2.50
ITM
2.50
2.00
70.00
72.00
0.50
2.00
ITM
2.00
1.50
70.50
72.00
0.50
1.50
ITM
1.50
1.00
71.00
72.00
0.50
1.00
ITM
1.00
0.50
71.50
72.00
0.50
0.50
ITM
0.50
-
72.00
72.00
0.50
-
ATM
0.00
-0.50
72.50
72.00
0.50
-0.50
OTM
0.00
-0.50
73.00
72.00
0.50
-1.00
OTM
0.00
-0.50
73.50
72.00
0.50
-1.50
OTM
0.00
-0.50
74.00
72.00
0.50
-2.00
OTM
0.00
-0.50
74.50
72.00
0.50
-2.50
OTM
0.00
-0.50
75.00
72.00
0.50
-3.00
OTM
0.00
-0.50
75.50
72.00
0.50
-3.50
OTM
0.00
-0.50
76.00
72.00
0.50
-4.00
OTM
0.00
-0.50
In the above case, we have simulated the profits and losses on the put option under various price levels. We can infer the following from the above table:
· The premium of Rs.0.50 is the fixed maximum loss on the contract. That is deducted from the strike of Rs.72 to arrive at your break even of Rs.71.50.
· The option is out of the money (OTM) till the exchange rate comes down to72/$. Till this point the option will be worthless and the premium of Rs.0.50 will be the maximum loss.
· The option is in the money (ITM) from Rs.72 downward. Below that level, you either reduce your premium loss or you enhance your profits.
· Profits can be unlimited on the downside (below 72) once the cost of the premium is covered and the dollar becomes weaker, your profits on the put option will keep building up.
· The put option on the USD-INR is purchased either when you expect the dollar to weaken or you expect the Indian rupee to strengthen. Either ways you can profitable by purchasing a USD-INR put option.