Question

A speculator sells a call option on Canadian dollars (contract size = 50,000) for a premium of $0.03 per unit, with an exercise price of $0.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar turns out to be $0.97 on expiration date, the profit (loss) to the buyer per unit is: a. $4,000 b. $2,500 C. $1,500 d. $4,000 e. None of these

Answer 1

The profit to the buyer per unit of the call option is $4,000 when the spot rate of the Canadian dollar is $0.97 on the expiration date, calculated by the difference between the spot rate and the sum of the exercise price and premium, multiplied by the contract size.

Step-by-step explanation:

The student asked about the profit or loss to the buyer of a call option if the spot rate of the Canadian dollar is $0.97 on the expiration date. The contract size is 50,000 units, and the call option was sold with an exercise price of $0.86 and a premium of $0.03 per unit.

To calculate the profit or loss per unit, we subtract the exercise price and the premium from the spot rate on the expiration date:

$0.97 (spot rate) - $0.86 (exercise price) - $0.03 (premium) = $0.08 profit per unit
Multiplying this profit per unit by the contract size gives us the total profit:$0.08 × 50,000 (contract size) = $4,000
Therefore, the profit to the buyer per unit is $4,000.