TST Hedge Fund wrote a call on £1,000,000 one year ago with a strike price of...

TST Hedge Fund wrote a call on £1,000,000 one year ago with a strike price of $1.2715 per pound expiring today. Today the spot rate is $1.2566 per pound. Please describe what you expect TST will do (or will have to do) today. I.e., please describe what cash flows will happen (on the expiration day) for the writer of this call.

Expert Solution

Write A Call Option- Write a Call Option means you are selling a call option, You are expected to fall in price and enjoy the premium.
If the Share price below the Strike price, Call will be lapse and you enjoy the premium. In the Write a call option Profit is limited and loss is unlimited.

In this case TST Hedge Fund write a call option Pound 1000,000 one year ago at a strike price of $1.2715 means they have to receive the premium of pound 1,000,000 and expected that price is fall, call is lapse and enjoy the Premium. Today strike price = 1.2566$ call is expire and earn the profit pound 1000000

Cash Flow today is equal to zero, because call is lapse and he enjoy the profit.

In this Question they asked that they Write the call option means the sell the option.
In Selling the option you receive a premium, therefore your loss is unlimited and profit is limited to the extent you receive a premium.
If the call is lapse you at the maturity your enjoy the premium and not bear any loss, Cashflow at that day is zero

jeff jeffy answered 2 years ago

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