Frank is an option speculator. He anticipates the Danish kroner will appreciate from its current level of $.19 to $.21. Currently, kroner call options are available with an exercise price of $.18 and a premium of $.02. Should Frank attempt to buy this option? If the future spot rate of the Danish kroner is indeed $.21, what is his profit or loss per unit?

Question

Quizplus · Accepted Answer

Frank should buy the option because he anticipates the Danish kroner will appreciate, which aligns with the option's potential for profit. If the future spot rate is $.21, after accounting for the exercise price of $.18 and the premium of $.02, his profit per unit would be $.01 ($.21 - $.18 - $.02 = $.01).

Frank Is an Option Speculator