a) Options on GBP trade on the Philadelphia Stock Exchange (PHLX). A call expiring in 3...

a) Options on GBP trade on the Philadelphia Stock Exchange (PHLX). A call expiring in 3 months with a strike price of USD 1.50 is trading at a price of USD 0.05. Consider an investor who buys 5 contracts and holds the options to maturity. At maturity, GBP is trading at USD 1.63. What it the net profit obtained by this investor? Assume the contract size is 10,000 currency units. Show your calculations.

B) In the above question, what is the net profit for the person who sold the 5 contracts? Show your calculations.

Expert Solution


Given	Strike Price of 3m call buy option=	$1.50
	Current trading Price	$0.05
	contract size	10000
	on maturity the price is	$1.63

Ans a	Investor has bought the call options so if the price of option on maturity exceeds the exercise price then the call will be exercised in his favour.
	Investor has bullish belief.
	Since on maturity the price of call option exceeds the exercise/strike price, the call is exercised in favour of investor
	So, Payoff = Spot price-Exercise price	(1.63-1.50)*10000
	=	1300
	Profit per option =	1300-500
	=	800

	Profit for 5 contracts=	800*5
	=	$4,000.00


Ans b	Investor has sold the call options so if the price of option on maturity exceeds the exercise price then the call will be against him.
	Investor has bearish belief.
	Since on maturity the price of call option exceeds the exercise/strike price, the call is exercised against the investor

	So, Payoff = Spot price-Exercise price	(1.50-1.63)*10000
	=	-1300
	Profit per option =	-1300-500
	=	-1800

	Profit for 5 contracts=	-1800*5
	=	($9,000.00)

jeff jeffy answered 1 year ago

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