Question

PLease no excel use. i)There is a positive relationship between the value of a call option and time until expiration.t/f

ii).An analyst at DEF hedge fund believes that the euro (which currently trades at $1.25) will appreciate relative to the dollar over the next 6 months. The analyst decides to use ten 6 month call options to speculate. Each contract has 50,000 euros attached. The call options have a strike price of $1.30 and a call premium of $.05. Find the analyst's profit/loss (in USD) if the spot price is $1.27 at expiration.

10,000 B25,000 C-25,000 D-10,000

iii)Find the analyst's profit/loss (in terms of USD) if the spot rate is €.5/$ at expiration

-325,000 B325,000 C-25,000 D25,000

Answer 1

Profit from long call= (call Payoff - premium)×m×C

Where

Call payoff= max(0,(S-K))

Where S = Spot price at expiration =1.27$per euro

And K= strike price = 1.30$ per euro

= max(0,(1.27-1.30))=0

Premium =.05$ per EURO

m= lot size of one contract = euro 50000

C= no. of contracts=10

Profit= (0-.05)×50000×10= $ -25000

Ans is C

Part b

Spot rate at expiration = .50 euro per$ = 1/.50=2$ per euro

Payoff= max(0,(2-1.30))=.70

Hence profit= (.70-.05)×50000×10=$325000

I.e. Ans is B