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Chapter 5

Q. 5.ST.1

A call option on Canadian dollars with a strike price of $.60 is purchased by a speculator for a premium of $.06 per unit. Assume there are 50,000 units in this option contract. If the Canadian dollar’s spot rate is $.65 at the time the option is exercised, what is the net profit per unit and for one contract to the speculator? What would the spot rate need to be at the time the option is exercised for the speculator to break even? What is the net profit per unit to the seller of this option?

Step-by-Step

Verified Solution

The net profit to the speculator is -$.01 per unit.
The net profit to the speculator for one contract is -$500 (computed as -$.01 × 50,000 units).
The spot rate would need to be $.66 for the speculator to break even.
The net profit to the seller of the call option is $.01 per unit.