Question

Citigroup sells a call option on euros with strike price of $1.33 (contract size is €500,000) at a premium of $0.02 per euro. If the spot price of the euro at expiration is $1.35, what is Citigroup’s profit (loss) on the call option?

Answer 1

Answer: €0

Step-by-step explanation:

A Call Option is exercised when the market price is greater than the strike price.

Here the Market Price is $1.35 and the Call Option is $1.33.

The loss to Citigroup as the seller therefore is,

= (1.35 - 1.33) * 500,000(contract size)

= €10,000

However because it was sold at a premium of €0.02 by Citigroup we have to account for that.

= 0.02 * 500,000

= €10,000

The Premium made by Citigroup on the sale was €10,000 but they suffered a loss of €10,000 as well.

These cancel each other out meaning that there was NO PROFIT or LOSS.