Question

1. (4 pts) LSU Corp purchased Canadian dollar call options for speculative purposes.  If these options are exercised, LSU will immediately sell the Canadian dollars in the spot market.  Each option was purchased for a premium of US$0.04 per unit, with an exercise price of US$0.75/1CAD.  LSU plans to wait until the expiration date before deciding whether to exercise the options.  Of course, LSU will exercise the options at that time only if it is feasible to do so.  Fill in the net profit (or loss) per unit to LSU Corp based on the listed possible spot rates (direct quote) of the Canadian dollar on the expiration date

            Possible spot rate of CAD on expiration date        Net Profit (Loss) per unit

                                                US$0.76/1CAD                                  

                                                US$0.78/1CAD                                  

                                                US$0.80/1CAD                                  

                                                US$0.82/1CAD                                  

                                                US$0.85/1CAD                                  

                                                US$0.87/1CAD                                  

Answer 1

Call Option is the right to buy the underlying asset at a specified price on a future date
The Option is exercised only when the ,arket price at maturity is higher than the strike price
Profit = (Market price - Strike price) - Premium paid
If not exercised, loss = Premium paid
Possible Spot rate	Action	Net Profit/(Loss) per unit
0.76	Exercise	-0.03
0.78	Exercise	-0.01
0.8	Exercise	0.01
0.82	Exercise	0.03
0.85	Exercise	0.06
0.87	Exercise	0.08