Question

In: Finance

An option trader purchased acall option on Russian ruble (₽) with a strike price of $0.01350/₽

An option trader purchased acall option on Russian ruble (₽) with a strike price of $0.01350/₽, at a premium of 0.00040 dollars per ruble and with an expiration date three months from now. The option is for ₽2,500,000.

(a) What would be the trader’s profit or loss if the spot rate at maturity is $0.01310/₽?

(b) What would be the trader’s profit or loss if the spot rate at maturity is $0.01380/₽?

Expert Solution

Call Option:

Holder of call option will have right to buy underlying asset at the agreed price ( Strike Price). As he is receiving right, he needs to pay premium to writer of call option.Holder of calloption will exercise the right, when expected future spot price > Strike Price. Then writer of option has obligation to sell at the strike Price. Holder will go for call option if he is bullish.

If the Future SPot Price > Strike Price - In the Money
If the Future SPot Price = Strike Price - At the Money
If the Future SPot Price < Strike Price - Out of the Money

Part A:

If Spot Price is 0.01310, Option will be lapsed. Entire premium paid is loss

Loss = 0.0004 * 2500000

= USD 1000

Part B:

If Spot Price is 0.01380, Option will be exercised.

Value of Call = Future spot Price - Strike Price

= $ 0.01380 - $ 0.01350

= $ 0.003

Net Payoff = Value of call - premium paid

= $ 0.0003 - $ 0.0004

= $ -0.0001

Net Payoff Total = $ -0.0001 * 2500000

= - $ 250

jeff jeffy answered 2 years ago

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