Question

In anticipation of a depreciation of the british pound, you decide to write a single call option with an exercise price of $1.14 and a premium of $0.79. each option contract covers 62,500 british pounds. if the spot rate at the option's maturity turns out to be $1.27, what is your total profit or loss for the call option contract (assuming the buyer of the option acts rationally)? submit your final answer rounded to two decimal places (ex. $0.00)

Answer 1

The total profit for the call option contract would be $8,125.

Step-by-step explanation:

To calculate the profit or loss for the call option contract, we need to consider the exercise price, premium, and spot rate at maturity.

The exercise price is $1.14, and the premium is $0.79.

If the spot rate at maturity is $1.27, it means the option buyer will exercise the option and buy British pounds at $1.14, even though the spot rate is higher.

To calculate the profit or loss, we need to find the difference between the exercise price and the spot rate, multiplied by the number of pounds covered by the option contract:

Profit or Loss = (Spot Rate - Exercise Price) * Number of Pounds Covered by Option

Profit or Loss = ($1.27 - $1.14) * 62,500

Profit or Loss = $0.13 * 62,500 = $8,125

Therefore, the total profit for the call option contract would be $8,125.