What are you buying if you purchase a U.S. dollar European put option against the Mexican peso with a strike price of MXN10.0/$ and a maturity of July? (Assume that it is May and the spot rate is MXN10.5/$.)
What will be an ideal response?
Answer: A European put option gives you the right to sell the underlying asset at the strike price on the maturity date of the contract. Thus, you are buying the right to sell USD for MXN at the price of MXN10.0/$ on the maturity date of the contract in July. This option is currently said to be "out of the money" because the strike price is lower than the current exchange rate.
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