An American firm has just bought merchandise from a British firm for £50,000 on terms of net 90 days. The U.S. company has purchased a 3-month call option of 50,000 pounds at a strike of $1.7 per pound and premium cost of $0.02 per pound. On the day the option matures, the spot exchange rate is $1.8 per pound. Should the U.S. company exercise the option at that time or buy British pounds in the spot market?

Question

Quizplus · Accepted Answer

The U.S. company should exercise the option because the strike price of $1.7 per pound is lower than the spot market rate of $1.8 per pound, allowing the company to save money on the exchange.

An American Firm Has Just Bought Merchandise from a British