You purchase a call option on pounds for a premium of $.03 per unit, with an exercise price of $1.64; the option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.65, your net profit per unit is:
A)-$.03.
B)-$.02.
C) -$.01.
D) $.02.
E) none of the above

Question

Quizplus · Accepted Answer

To calculate the net profit per unit, we need to compare the exercise price with the spot rate. In this case, the exercise price is $1.64 and the spot rate on the expiration date is $1.65.

Since the spot rate is higher than the exercise price, the option will be exercised, and the profit per unit will be the difference between the spot rate and the exercise price, minus the premium paid for the option.

Net profit per unit = ($1.65 - $1.64) - $0.03 = $0.02

Therefore, the best choice is B: $.02.

You Purchase a Call Option on Pounds for a Premium