Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of $.02. If the spot rate at the option's maturity turns out to be $1.54, what is Carl's profit or loss per unit (assuming the buyer of the option acts rationally)?
A) -$.01
B) $.01
C) -$.04
D) $.04
E) -$.03

Question

Quizplus · Accepted Answer

The profit or loss per unit is equal to the difference between the premium received and the difference between the spot rate at maturity and the exercise price. In this case, the premium received is $.02, the spot rate at maturity is $1.54, and the exercise price is $1.51. Therefore, the profit or loss per unit is $.02 - ($1.54 - $1.51) = $.01.

Carl Is an Option Writer