Answer to Question #141727 in Economics for feker

Question

Assume that Mr.Binda is aspeculator 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 expiration date,the spot rate of a pound reaches 27.18$.
a. Determine the profit or loss if the option is exercised
b. B. determine the value of the call option if the option is exercised

Answer 1

a.

A profit is

$$(27.18-27.02)\times10000=1600$$

b.

$$0.05\times10000=500$$