Consider a USD call/JPY put option struck at 82. The option price is 2.00 (2 yen per dollar of underlying). The breakeven point will, therefore, be at a USD/JPY rate of 84 (option price + cost of premium). The option owner makes money once the payoff exceeds the premium value (when USD/JPY rises above 84). The graph demonstrates this.
Breakeven Point – Forward Value of Premium
Strictly speaking, the forward value of the premium at the expiry date should be considered. If the USD call/JPY put option was a 3-month option and rates were 4%, then the future value of the premium would be 2.02. The breakeven point would, therefore, be 84.02.
Review Question: Breakeven for EUR Put/USD Call
A 6-month EUR put/USD call, struck at 1.2000 (EUR/USD), is priced at 0.0338 USD per underlying euro. Assume interest rates are 0%. What would be the breakeven EUR/USD rate for this trade (correct to four decimal places)?