Question

Assume that you buy a call option on euros with a strike price of $1.25/€ at a premium of 3.80 cents per euro ($0.0380/€) and an expiration in three months. The option is for €100,000. Calculate your total profit or loss if you exercise when the euro spot rate is each of the following: $1.10/€, $1.20/€, $1.30/€, $1.40/€

Answer 1

If Spot > Strike then profit.

a). $1.1/€<$1.25/€ so no profit.

Cost of option = [$0.038/€] * €100,000 = Loss of ($3,800)

b). $1.2/€<$1.25/€ so no profit.

Cost of option = [$0.038/€] * €100,000 = Loss of($3,800)

c). $1.3/€>$1.25/€ so profit of (1.3-1.25) $0.05/option.

Profit = $0.05 - $0.038 = $0.012  

Net Profit = [$0.012/€] * €100,000 = $1,200

d). $1.4/€>$1.25/€ so profit of (1.4-1.25) $0.15/option.

Profit = $0.15 - $0.038 = $0.112  

Net Profit = [$0.112/€] * €100,000 = $11,200