Question

1. a. You are short 3 contracts of 1-yr call option on Dow index with a strike price (K) of $28,000. What will be your payoff at expiry if the Dow index level at expiry (S_T) becomes $30,000?

b. The current euro exchange rate is $1.10 (dollar price of euro). Assume zero interest rates for both currencies. If you are long 100 contracts of 2-yr forward contracts on euro with a delivery price (K) of $1.00, what will be the current value of your forward position?

Answer 1

A) call option gives it's buyer a right to buy underlying at specified price in future. It means seller of option is oblige to sell underlying if buyer exercises the option

Here option will be exercised by the buyer sincr market price is higer than strike price , hence one will be obliged to sell

Here we are seller of call option, hence loss = no of contracts x (market price - exercise price)

= 3 x (30,000 - 28,000)

= 3 x (2000)

= 6000

Thus loss = 6000$

B) current value of forward position = no of contract x market price

= 100 x 1.1

= 110$