I want the option to buy 1,000,000 EUR at a minimum USD rate through a Long Put.
Current Spot Rate = USD/EUR = 1.20
Put Option
X = EUR/USD = 0.8080
Premium = EUR/USD = 0.0134
Notional Principal = 1,000,000 / 0.8080 = 1,237,624 USD
Premium Cost = 1,237,624 x 0.0134 = 16,584 EUR
What’s the cost of the 16,584 EUR in USD? A or B?
A. 16,854 / 0.8080 = 20,525 USD
B. 16,854 x 1.20 = 19,901 USD
I don’t understand why the textbook uses A.
Wouldn’t we use the current spot rate for the cost of the option?
Thanks.