Question

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?

Group of answer choices

yes; $0.01.

no; -$0.04.

yes; $0.03.

no; -0.01.

Answer #1

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)**

An option speculator anticipates the Danish kroner will
appreciate from its current level of $.15 to $.17. Currently,
kroner call options are available with an exercise price of $.16
and a premium of $.01
(1) Should the speculator buy this option?
(2) If the future spot rate of the Danish kroner is $.17, what
is his profit or loss per unit?
Please show how answer is derived.

Andrea is an option speculator. She anticipates the Canadian
dollar to depreciate from its current level of $0.90 to $0.85.
Currently, Canadian dollar call options are available with an
exercise price of $0.91 and a premium of $0.02. Also, Canadian
dollar put options are available with an exercise price of $0.88
and a premium of $0.02. If the future spot rate of the Canadian
dollar is $0.85, what is Andrea's profit or loss per unit?

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 4 minutes ago

asked 8 minutes ago

asked 10 minutes ago

asked 11 minutes ago

asked 11 minutes ago

asked 11 minutes ago

asked 14 minutes ago

asked 26 minutes ago

asked 26 minutes ago

asked 26 minutes ago

asked 28 minutes ago

asked 29 minutes ago