A gain can be made by the holder of a call option when the current exchange rate

Question

Quizplus · Accepted Answer

A call option gives the holder the right, but not the obligation, to buy a currency at an agreed-upon exercise price. Therefore, the holder of a call option will make a gain when the current exchange rate exceeds the exercise price, as they can buy the currency at a lower price and then sell it at the higher market rate, realizing a profit. Choices B and C are incorrect because they refer to forward and futures prices, respectively, which are different financial instruments than call options. Choice D is incorrect because a call option holder will not derive any value from the option if the exchange rate falls to zero.

A Gain Can Be Made by the Holder of a Call