Question

Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of $0.02. If the spot rate at the option's maturity turns out to be $1.54, what is Carl's profit or loss per unit (assuming the buyer of the option acts rationally)?

Answer 1

Please find the detailed answer as follows.

Step-by-step explanation:

Premium received (cash inflow ) - $ .02

On maturity : Option is exercisable as spot rate is higher than exercise price

loss to carl = 1.51- 1.54 = $ .03

Net gain /(loss)= .02 - .03 = - .01 (loss)