* An importer needs to make a payment pf Euros 70,000 in 60 days. The importer\'
ID: 2721069 • Letter: #
Question
* An importer needs to make a payment pf Euros 70,000 in 60 days. The importer's Finance Manager purchase a Call of Option to purchase the Euros in 60 days. Suppose the following facts:
Cnotract Size= Euros 70,000
Exercise Price= $1.50 per Euro
Option Premium $0.03 perEuro
Experiation Date 60 days
a) Calculate the profit (loss) when the spot rate in 60 days is $1.55/euro; $1.45/euro; $1.50/euro. Show all your work with Formulas.
b)Calculate the profit (loss) when the spot rate in 60 days is $1.53. Would the call option be IN or OUT of the Money at $1.53/euro? and why?
Explanation / Answer
a) Profit loss when spot is $1.55/euro
Therfore as the strike price is $1.5
He will make a neat profit of = 1.55-1.50 =$.05
We have to subtract option premium fromt his price to get the price
= $.05-$.03= $0.02 per euro
=$70,000*.02 =$1400
When spot is at 1.45
He will make a neat profit of = 1.45-1.50 =-$.05
We have to subtract option premium fromt his price to get the price
-.$05 - $.03 = -$.08
=-$70,000* .08 = -$5600
When spot is $1.5
Los on option would be $.15-$1.5 =0
We have to subtract option premium fromt his price to get the price
-$0.3 = -0.3*$70000 = $2100
b) When the spot is $1.53 there would be gain of $.03 per option
Also there would be loss of $.03 paid as option premium
Total loss = Gain - option prmium
$.03-$0.03 =0
Option is in the money when spot > exercise price
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