Question

Assume the following options are currently available for British pounds (₤):

•Call option premium on British pounds = $.04 per unit

•Put option premium on British pounds = $.03 per unit

•Call option strike price = $1.56

•Put option strike price = $1.53

•One option contract represents ₤31,250.

12. At a long strangle position, what is your profit (loss) when spot exchange rate changes to $1.40

A. -$0.04

B. +$0.14

C. +$0.10

D. +$0.06

E. -$0.06

13. What is the profit (loss) you earn from the Call option in the long strangle position, when spot exchange rate changes to $ 1.53

A. -$0.04

B. -$0.03

C. +$0.03

D. +$0.01

E. -$0.01

Answer 1

Long strangle is a strategy which involves buying call and put option at the different strike prices of an underlying.

Premium paid for the purchase = Call premium + Put premium = $0.04 + $0.03 = $0.07

12) Profit (loss) when spot exchange rate changes to $1.40:

As the spot rate was $1.40, the call option will not be exercised as the spot rate is below the call option strike price which is $1.56.

Put option will be exercised as the strike price of put option $1.53 is more than $1.40.

Profit on put option = $1.53 - $1.40= $0.13

Net Profit = Total profit - premium paid = $0.13 - $ 0.07 = $0.06

Net Profit = $0.06( Option D)

13) Profit (loss) when spot exchange rate changes to $ 1.53:

As the spot rate is $1.53, the call option will not be exercised as the spot rate is below the call option strike price of $1.56.

Premium paid for the call option will be -$0.04 will be the loss in this case. (Option A)