You are a speculator who sells a call option on Swiss francs for a premium of $.06,with an exercise price of $.64. The option will not be exercised until the expiration date,if at all. If the spot rate of the Swiss franc is $.69 on the expiration date,your net profit per unit,assuming that you have to buy Swiss francs in the market to fulfil your obligation,is:
A) $.02.0
B) $.01.
C) $.01.0
D) $.02.
E) none of the above

Question

You are a speculator who sells a call option on Swiss francs for a premium of $.06,with an exercise price of $.64.  The option will not be exercised until the expiration date,if at all.  If the spot rate of the Swiss franc is $.69 on the expiration date,your net profit per unit,assuming that you have to buy Swiss francs in the market to fulfil your obligation,is:
A) $.02.0
B) $.01.
C) $.01.0
D) $.02.
E) none of the above

Quizplus · Accepted Answer

Since the option was sold for a premium of $.06 and the exercise price is $.64, the breakeven point for the speculator is ($.64 + $.06) = $.70. If the spot rate on the expiration date is $.69, the option will not be exercised and the speculator gets to keep the premium. Therefore, the net profit per unit is $.06. However, if the spot rate is above $.70, the option will be exercised and the speculator will have to buy Swiss francs at the spot rate to fulfill their obligation. If the spot rate is below $.70, the speculator will not exercise the option and the net profit will be the premium received. Therefore, the correct choice is C.

You Are a Speculator Who Sells a Call Option on Swiss