Question

Suppose Company A bought a call option for $0.03 per euro, with a spot rate of 1euro to $1.0872, the strike price 30-days forward is 1 euro to the US$ is1.0915. If the spot rate 30 days from now is $1.0920, determine the profit/loss on the call option for $1.0910, $1.0915, $1.0918 and $1.0920. Contract size is 62,500 euros. (10 points) (Ch 8)

Please provide step by step solution when providing the explanation

Answer 1

Profit of call option (per euro) = Max[S-X, 0] - P

where :

S = spot rate at expiry,

X = strike price

P = premium paid

Profit of call option (on contract) = Profit of call option (per euro) * number of euros per contract

The number of euros per contract is 62,500

The profit/loss is calculated as below :

The formulas are below :

The formulas are above