In: Finance
At expiry, a holder of a call option with an exercise price of $32 (purchased for a premium of $0.85) over Wesfarmers shares (now trading at $33.65) will:
Select one:
not exercise with a loss of $1.65 per share
exercise with a profit of $1.65 per share
exercise with a profit of $0.80 per share
not exercise with a loss of $0.85 per share
exercise with a profit of $0.85 per share
It is a case of call option
If price on expiry is greater than strike price, call will be exercised.
Here,
Strike price =32
Premium paid =0.85
Now price on expiry = 33.65
Which is higher than strike price, so call will be exercised.
Payoff = price on expiry- strike price
Payoff = 33.65 - 32 = 1.65
Profit = Profit - premium paid = 1.65 -0.85 =0.80
Answer : exercise with a profit of 0.80 per share. [Thumbs up please]