Question

Joshua wrote a call option on GBP for USD 0.022 per unit. The strike price is 1.3875 and the spot rate at the time the option maturity is GBP/USD 1.4225, i.e. the price of 1 for GBP. There are 62,500 units in one GBP option. What was Joshua's net profit/loss on this option?

	a.	Loss of USD 812.50
	b.	Profit of USD 1187.50
	c.	Profit of USD 1312.50
	d.	Loss of USD 2500

Answer 1

The call option is the option in which the option buyer gets the right to buy the option if the price of underlying is the more than the exercise price and the seller of the option is liable to pay the difference.

Joshua Writes the option @ 0.022 per unit for 62500 units So by writing amount got is 1375.

But since the price at expiry is more than the exercise price Joshua will be liable to pay the amount which is equal to at (Price at expiry - Strike price)* quantity

(1.4225-1.3875)*62500 = 2187.50

So net loss for Joshua = 2187.50-1375 = 812.50

So A is the correct answer