Frank is an option speculator.He anticipates the Danish kroner to 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
A) no;-$0.01.
B) yes;$0.01.
C) yes;-$0.01.
D) yes;$0.03.

Question

Quizplus · Accepted Answer

If the future spot rate of the Danish kroner is indeed $.21, Frank's profit per unit will be $0.01. This is because he will be able to exercise his option to buy kroner at $.18 and then immediately sell them in the spot market for $.21, netting a profit of $.03 per unit. However, he will have to pay a premium of $.02 to buy the option, so his overall profit will be $.01 per unit.

Frank Is an Option Speculator