A call option on Canadian dollars with a strike price of $0.60 is purchased by a speculator for a premium of $0.06 per unit. Assume there are 50,000 units in this option contract. If the Canadian dollar’s spot rate is $0.65 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 when the option is exercised for the speculator to break even? What is the net profit per unit to the seller of this option?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 5, Problem 1ST
Textbook Problem

A call option on Canadian dollars with a strike price of $0.60 is purchased by a speculator for a premium of $0.06 per unit. Assume there are 50,000 units in this option contract. If the Canadian dollar’s spot rate is $0.65 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 when the option is exercised for the speculator to break even? What is the net profit per unit to the seller of this option?

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