Question

In: Finance

If we write a European call option on €, the strike price is $1.2141/€. The option...

If we write a European call option on €, the strike price is $1.2141/€. The option premium is $0.0500/€. On the expiration date, the market spot price is $1.3262/€. Then__

A. The option is exercised, and we lose $0.0621/€.

B. The option is not exercised, and we profit $0.0500/€

C. The option is exercised, and we lose $1.2762/€.

D. The option is not exercised, and we profit $0.1121/€

Solutions

Expert Solution

We are writer or seller of a call option.
Therefore, we have obligation to sell on expiration date at strike price.
We will collect premium on sale of call option.
Premium= $ 0.0500 per euro
Strike Price= $ 1.2141 per euro
Spot Price at expiration = $ 1.3262 per euro
As spot price on expiration is higher that strike price , thus buyer will buy at strike price and accordingly we have obligation to sale at strike price.
we incur loss on expiration= ($ 1.3262 - $1.2141) per euro
= $ (0.1121) per euro
Net Profit ( Loss ) = Loss on expiration + Premium Received
= $ (0.1121)+ $ 0.0500
=( 0.0621) per euro
Therefore answer would be A. i.e. The option is exercised , and we lose $ 0.0621/ €

jeff jeffy answered 1 year ago
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