Question

7.  Bulldog, Inc., has sold Australian dollar call options at a premium of $.02 per unit, and an exercise price of $.89 per unit. It has forecasted the Australian dollar’s rate over the period of concern as $.86, $.84, $.86, $.85, $.93 and $.94. Determine the net profit (or loss) per unit to Bulldog, Inc., if Australia dollar each level occurs (show detailed analysis; follow the five steps in the teaching notes).   

Answer 1

Bulldog,Inc has sold call option. So it is the option writer.

Exercise price=$0.89. Since it is a call option the Option will get exercised only at >=$0.89.Below $0.89 it will lapse.

Premium=$0.02 per unit

Table showing the profit and loss at different prices on expiry of the contract

Exercise Price	Price at expiry	Call (E/L)	Payoff	Premium	Net
0.89	0.86	Lapse	-	0.02	0.02
0.89	0.84	Lapse	-	0.02	0.02
0.89	0.85	Lapse	-	0.02	0.02
0.89	0.93	Exercise	0.89-0.93=(0.04)	0.02	0.02-0.04=(0.02)
0.89	0.94	Exercise	0.89-0.94=(0.05)	0.02	0.02-0.05=(0.03)