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Bulldog, Inc., has sold Australian dollar call options at a premium of $.03 per unit, and...

Bulldog, Inc., has sold Australian dollar call options at a premium of $.03 per unit, and an exercise price of $.89 per unit. It has foretasted the Australian dollar's rate over the period of concern as $.86, $.87, $.88, $.89, $.91 and $.92. Determine the net profit (or loss) per unit to Bulldog, Inc., if Australia dollar each level occurs (show detailed analysis; follow the five steps in the teaching notes).

Solutions

Expert Solution

Underlying Asset : Australian Dollar (AUD), Call Premium = $ 0.03 / AUD, Call Strike Price = $ 0.89 / AUD

(a) Spot Price = $ 0.86, Call Payoff = Spot Price - Strike Price if Spot Price > Strike Price, otherwise Call Payoff =$ 0

Call Payoff = $ 0

Overall Gain/ Loss = Call Payoff - Premium = 0 - 0.03 = - $ 0.03

(b)

Spot Price = $ 0.87, Call Payoff = Spot Price - Strike Price if Spot Price > Strike Price, otherwise Call Payoff =$ 0

Call Payoff = $ 0

Overall Gain/ Loss = Call Payoff - Premium = 0 - 0.03 = - $ 0.03

(c)

Spot Price = $ 0.88, Call Payoff = Spot Price - Strike Price if Spot Price > Strike Price, otherwise Call Payoff =$ 0

Call Payoff = $ 0

Overall Gain/ Loss = Call Payoff - Premium = 0 - 0.03 = - $ 0.03

(d)

Spot Price = $ 0.89, Call Payoff = Spot Price - Strike Price if Spot Price > Strike Price, otherwise Call Payoff =$ 0

Call Payoff = $ 0

Overall Gain/ Loss = Call Payoff - Premium = 0 - 0.03 = - $ 0.03

(e)

Spot Price = $ 0.91, Call Payoff = Spot Price - Strike Price if Spot Price > Strike Price, otherwise Call Payoff =$ 0

Call Payoff = $ 0.02

Overall Gain/ Loss = Call Payoff - Premium = 0.02 - 0.03 = - $ 0.01

(f)

Spot Price = $ 0.92, Call Payoff = Spot Price - Strike Price if Spot Price > Strike Price, otherwise Call Payoff =$ 0

Call Payoff = $ 0.03

Overall Gain/ Loss = Call Payoff - Premium = 0.03 - 0.03 = $ 0

jeff jeffy answered 11 months ago
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