Question

# Frank is an option speculator. He anticipates the Danish kroner will appreciate from its current level...

Frank is an option speculator. He anticipates the Danish kroner will appreciate from its current level of \$.19 to \$.21. Currently, kroner call options are available with an exercise price of \$.18 and a premium of \$.04. Should Frank attempt to buy this option? If the future spot rate of the Danish kroner is indeed \$.21, what is his profit or loss per unit?

​yes; \$0.01. ​

no; -\$0.04.

​yes; \$0.03.

no; -0.01.

Sol :

Given,

Frank anticipates Danish kroner will appreciate from its current level of \$0.19 to \$0.21.

Kroner call options are available with an exercise price of \$0.18 and a premium of \$0.04.

Should Frank attempt to buy this option? If the future spot rate of the Danish kroner is indeed \$0.21?

Frank profit or loss per unit?

Danish kroner current price = \$0.19

Right to buy kroner can be avail at \$0.18 for 0.04\$, which is \$0.03 higher than the current price.

Now assuming Danish kroner spot rate appreciate to \$0.21.

Then the right to buy Danish kroner at \$0.18 will be worth \$0.03, which is \$0.01 less than the amount paid for the right at \$0.04. hence it is a loss of \$0.01

Therefore Frank should not buy this option, if the future spot rate of the Danish kroner is indeed \$0.21.

Also Frank loss per unit will be \$0.01.

So answer will be (no; -0.01)

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