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)