Question

A UK company has purchased a Call Option on UK ₤ for 0.02 dollars per ₤. The strike price was ₤1=$1.47 and the spot rate at the time the option could be exercised was ₤1=$1.56. There are ₤32,500 in a Sterling Option Contract. Calculate the company’s net profit, illustrating your answer with a Contingency Graph of the Call Option position.

Answer 1

Spot rate	1.56
less: exercise price	1.47
Option payoff	0.09
Less: option premium	0.02
net profit	0.07
multiply contract size	32,500
Total profit	2,275

Position:

The position of option can be labelled as below:

Expected spot rate	Exercise price	Option payoff	Net profit	Total profit
a	b	c= max(1-b,0)	d= c- 0.02	e= d*32500
0	1.47	0	-0.02	-650
0.2	1.47	0	-0.02	-650
0.4	1.47	0	-0.02	-650
0.6	1.47	0	-0.02	-650
0.8	1.47	0	-0.02	-650
1	1.47	0	-0.02	-650
1.2	1.47	0	-0.02	-650
1.4	1.47	0	-0.02	-650
1.56	1.47	0.09	0.07	2275
1.76	1.47	0.29	0.27	8775
1.96	1.47	0.49	0.47	15275
2.16	1.47	0.69	0.67	21775
2.36	1.47	0.89	0.87	28275
2.56	1.47	1.09	1.07	34775

in a graph:

The position shows loss is limited to call option premium, where as gain is theoretically unlimited.