In: Finance
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.
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