Option Payoff & Profit/Loss Today’s spot exchange rate is €1=$1.4870. Consider t

Question

Option Payoff & Profit/Loss

Today’s spot exchange rate is €1=$1.4870. Consider the following call option on euro, ‘147 December Euro’ which is selling at 0.85¢ per €. For a trader who has a long position on the call option, answer the following questions.

(1) Determine the payoff and profit/loss if today is the expiration date

(2) Draw and indicate CLEARLY the option payoff line and profit/loss line for the call option holder and indicate CLEARLY the following information and the values on the graph, (a) The break-even spot rate for the call option; (b) The maximum loss for the call holder if the option is not exercise at expiration; (c) The spot price that makes the call option at-the-money.

Explanation / Answer

Spot price of Options= 1.48

Strike price of Options= 1.47

1- Profit of this Options is unlimited if it moves towards high

2- The max loss of Call holder is the Options premium, he/she pays that is .85

If the spot price is 1.47, that Options will be At-the -money

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