Question

You are a speculator who sells a call option on Swiss francs for a premium of $.06, with an exercise price of $.64. The option will not be exercised until the expiration date, if at all. If the spot rate of the Swiss franc is $.69 on the expiration date, your net profit per unit is:

a.-$.02.
b.-$.01.
c. $.01
d. $.02
e.None of the above.
I know the answer is C(.01) but don't know how. please list formula and work.

Answer 1

c. $.01

Step-by-step explanation:

The computation of the net profit per unit is shown below:

= Exercise price + Premium - Spot rate on the expiration date

= $0.64 + $0.06 - $0.69

= $0.01

To find out the net profit per unit we added the premium and deducted the spot rate on the expiration date to the exercise price so that the true value per unit can come.