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

The current spot exchange rate is $1.15 /Euro and the
three-month forward rate is $1.30/Euro. Consider a three-month
American call option on €62,500 with a premium of $0.25 per
Euro.
For this option to be considered out- of-money, the strike price
can be_____________.
$1.25
$1.50
$1.00
$1.15

Citigroup buys a call option
on euros (contract size is €600,000) at a premium of $0.02 per
euro. If the exercise price is $1.44/€ and the spot price of the
euro at date of expiration is $1.48/€,
A. Will this option be exercised, that is, is in-the-money
or out-of-the-money? Why? (2 points)
B. What is Citigroup's profit (or loss) on the call
option? (3 points)

A trader believes that the euro will appreciate versus the yen.
She wants to use a forward contract to potentially profit from her
view. The spot rate is ¥0.10/€ and the forward rate is ¥0.08/€.
Should she buy or sell a forward on euros? If the spot rate
finished at ¥0.12/€ then calculate her profit/loss If the spot rate
finished at ¥0.05/€ then calculate her profit/loss
Multiple Choice:
sell euros forward; -¥0.02/€ profit; ¥0.05/€ loss
sell euros forward; -¥0.02/€ loss;...

A trader believes that the euro will depreciate versus the yen.
She wants to use a forward contract to potentially profit from her
view. The spot rate is ¥0.10/€ and the forward rate is ¥0.08/€.
Should she buy or sell a forward on euros?
If the spot rate finished at ¥0.12/€ then calculate her
profit/loss
If the spot rate finished at ¥0.05/€ then calculate her
profit/loss
Answers:
Buy euros forward; ¥0.04/€ profit; -¥0.03/€ loss
buy euros forward; -¥0.02/€ profit; ¥0.05/€...

a. A speculator purchased a call
option on Japanese Yen at a strike price of $0.70 and for a
premium of $.06 per unit. At the
time the option was exercised if the Japanese Yen spot
rate was $.75
a) Find the speculator’s net profit
per unit?
b) If each contract is made up of
62500 units what is the net profit per contract?
c) At which spot price will the
speculator break even?
d) What is the...

5. Assume a call option on euros is written with a strike price
of $1.2500/€ at a premium of 3.80¢ per euro ($0.0380/€) and with an
expiration date three months from now. The option is for €100,000.
Calculate your profit or loss (in each of the following scenarios)
when the euro is traded at the following spot rates: (1) $1.12/€
(2) $1.24/€ (3) $1.32/€? (4) $1.36/€

Assume that you buy a call option on euros with a strike price
of $1.25/€ at a premium of 3.80 cents per euro ($0.0380/€) and an
expiration in three months. The option is for €100,000. Calculate
your total profit or loss if you exercise when the euro spot rate
is each of the following: $1.10/€, $1.20/€, $1.30/€, $1.40/€

A call option on the euro expiring in Six months has an exercise
price of $1.00 and is priced at $ 0.0385. Construct a simple long
position in the call. determine the profit from the following basic
foreign currency option transactions for each of the following spot
rates at expiration: $0.90, $0.95, $1.00, $1.05, and $1.10.
Construct a profit graph. Find the breakeven spot rate at
expiration. Assume that each contract covers 100,000 euros.
(Show answers in Excel if possible)

spot rate now is $1.1201/€, and home currency usd
Put on option Euro (€). strike price of $1.0640/€ and a premium
of $0.00038/€.
a)find break-even price for the option.
b) any purchaser, when spot rate is $1.1740/€, is the option
at-the-money, or in-the-money, or out-of-the-money?
c) find net profit for the option if the spot rate is
$1.0000/€.

You are given the following information on American options for
the Euro against the US dollar, unless otherwise stated
Compute the profit or loss for each alternative.
Provide computational support for your final
answers.
Type of Option
Maturity (days)
Strike Price $/Euro)
Option premium (% of strike price)
Spot rate, $/Euro (on day)
Profit/loss
CALL
45
1.4000
4
1.5000 (44)
PUT (European)
75
1.7000
7
1.6500 (72)
CALL (European)
75
1.8500
6
1.9500 (75)

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