Question

assuming the current spot price of gold is $1.86 , a three month call option on 1000 ounces of gold has an exercise price of $1.80 and a premium of $0.24 . if after two months the price per ounce of gold is $2.10 and the premium on this option is now $0.36 . should the investor trade or exercise this option?

Answer 1

Answer :- (Given) Spot rate (SR) = $1.86 , Exercise price (X) = $ 1.80 & Premium (OP) = $ 0.24

After two months , (Given) Spot rate (SR) = $2.10 & Premium (OP) = $ 0.36

a) Assume that investor is on Long position now, When he will take short position after two months then

Intrinsic Value (IV) = SR - X

IV = $ 2.10 - $1.8 = $0.3 , hence investor will trade this option

Net pay off = IV - OP

= $0.3 - $ 0.24 = $ 0.06 (profit)

b) Assume that investor is on Short position now, When he will take long position after two months then

Intrinsic Value (IV) = SR - X

IV = $ 2.10 - $1.8 = $0.3 , hence investor will excercise this option and buyer will get loss

Net pay off = $1.8 + 0.36$ = $2.16