Question

Suppose the current spot exchange rate between the U.S. dollar and British pound is $1.6/£. A European call option on pounds is expiring today. The call option has an exercise price of $1.56/£. At the same time, a European put option on pounds is expiring today. The put option has an exercise price of $1.65/£. 2 points

Given the information above, which of the following is correct?

1. both the call option and the put option are out-of-the-money. 

2. both the call option and the put option are in-the-money. 

3. the call option is in-the-money while the put option is out-of-the-money.
4. the call option is out-of-the-money while the put option is in-the-money. 


Answer 1

	For a Call Option
	If the actual price of the underlying asset is more than the
	strike/exercise price, then the call option is said to be
	"in the money".
	In the given problem actual price i.e. current spot price $1.60
	is more than the exercise price i.e $1.56, so call option is
	"in the money".
	For a Put Option
	Put Option is said to be in-the-money if actual price of the
	underlying asset is less than the exercise price.
	In the given problem Current Spot price $1.60 is less than
	the exercise price of $1.65, so Put Option is in-the-money.
	So, answer is Option (b).
	both the call option and the put option are in-the-money