Question

Suppose the current spot rate for the Australian dollar is US$0.8321. The intrinsic value of an A$ 50,000 call option with an exercise price of US$0.8195 is (a) 0 (b) $630 (c) $740 (d) $2,340 (e) None of the above

Answer 1

Answer is $630

Before we calculate the answer to this question, let us undersatnd the information that question gives us, and we should be able to solve the question by that.

Based on the question, spot rate for AUD is US$0.8321. So you could but 1 AUD for US $0.8321 in spot market. Based on the option, you could purchase 1 AUD for $0.8195. Since this exercise price in call option is lower than in spot market, a rational investor would you this option.

The profit per AUD would be = US$0.8321 - US$0.8195 = US$0.0126 per AUD

Hence, for 50,000 AUD, profit = 50,000 * US$0.0126 = $630