When a currency call option is classified as "in the money," this indicates that
A)the spot rate of the currency is less than the exercise price of the option.
B)the spot rate of the currency is greater than the exercise price of the option.
C)the buyer of the option would generate a profit; that is, the spot rate would exceed the sum of the exercise price and the premium paid.
D)the buyer of the option would generate a profit; that is, the exercise price would exceed the sum of the spot rate and the premium paid

Question

Quizplus · Accepted Answer

When a currency call option is "in the money" it means that the spot rate of the currency is higher than the exercise price of the option. This is because the buyer of the option has the right to buy the currency at the exercise price, which is lower than the current market price. Thus, the buyer would generate a profit if they exercised the option and bought the currency at the lower exercise price, then sold it at the higher spot rate in the market, after paying the premium.

When a Currency Call Option Is Classified as "In the Money