Question

Gretchen Van Damme is considering buying call option on Swiss francs on the International Monetary Market of the Chicago Mercantile Exchange with a March expiration date and a strike price of $0.77/SF. The current spot rate of exchange is $0.77/SF. Gretchen believes that the spot rate in March will be between $0.74/SF and $0.81/SF, with a most likely value of $0.77/SF.

a. Calculate Gretchen's gain or loss at closing spot rate of $0.74/SF, $0.77/SF, and $0.81/SF.

b. Diagram the value of Gretchen's Swiss franc call option at expiration.

c. Suppose the price of a call option on Swiss francs is $0.02/SF, diagram the profit or loss on Gretchen's Swiss francs call option at expiration as a function of the underlying S$/SF exchange rate

Answer 1

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