Using the data for the problem, assume that you entered into an option with Goldman Sachs for one contract worth £75,000 at a premium of $.0325, a strike price of 162 and a brokerage fee of $25 to get into the option and also to exercise the option. Would you exercise the option?

Question

Quizplus · Accepted Answer

To determine whether to exercise the option, we compare the profit from exercising the option to the profit from not exercising it. If we exercise, we pay the strike price of 162, plus the brokerage fee of $25, for a total cost of £106.25. We receive £75,000 at the spot rate of June 1. If the spot rate is greater than $1.039 per £1 (which is calculated as $162 + $0.0325 - $75,000/£75,000), then exercising the option would yield a profit greater than not exercising it. Given the spot rate on June 1 was $1.05 per £1, which is greater than $1.039 per £1, the best choice would be to exercise the option. Therefore, the answer is option A.

Using the Data for the Problem, Assume That You Entered