A Call Option Exists on British Pounds with an Exercise

question 27

Multiple Choice

A call option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.03 per unit. A put option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.02 per unit. You plan to purchase options to cover your future receivables of 700,000 pounds in 90 days. You will exercise the option in 90 days (if at all) . You expect the spot rate of the pound to be $1.57 in 90 days. Determine the amount of dollars to be received, after deducting payment for the option premium.

• A) $1,169,000.
• B) $1,099,000.
• C) $1,106,000.
• D) $1,143,100.
• E) $1,134,000.

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Definitions:

Future Value

The amount of money in the future that an amount of money today will yield, given prevailing interest rates

Risk-averse Individuals

People who prefer to avoid risk and would rather accept a lower expected return on an investment than subject themselves to higher volatility and potential loss.

Comparable Bad Things

Situations or items that have similarly negative attributes or impacts, allowing for a comparison of their undesirability.

Interest Rate

The percentage of a sum of money charged for its use, typically by a bank or financial institution to borrowers, or paid to savers and investors.