Answer to Question #173464 in Finance for sisay tadele

Question

Assume that Mr. Binda is a speculator who buys a 90-day British ^{Pound call option with a strike} price of $27.02. Assume one option contract specifies 10,000 units and the current spot price as of that date is $26.87. Mr. Binda pays a premium of $0.05 per unit for the call option and no other charge (such as brokerage fee). Just on the expiration date, the spot rate of a pound reaches $27.18.

Required:-

a) Determine the profit or loss if the option is exercised,

b) Determine the value of the call option lithe option is exercised.

Answer 1

initial price

$a) 10000\times27.02=\$272,000$

price after call option $=10000\times26.87-0.05\times10000=\$268,200$

profit$=272,000-268,200=\$3800$

b) $10000\times27.18=\$271,800$