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3. (a) Define currency options contract. What are put and call options? (b) You bought a Dec. 20 call option on Australian dollar with a
3. (a) Define currency options contract. What are put and call options? (b) You bought a Dec. 20 call option on Australian dollar with a strike price (K) of $0.7850/A$ in June 20 and paid a premium of $0.02/A$. The current spot exchange (S) rate for A$ is $0.7920/A$. (i) What are the intrinsic and the time values of this option? (ii) (a)What is the profit/loss if the option is exercised at expiration if the spot rate settles at $0.8000/A$? (b) if the spot rate settles at $0.7800? The U.S. interest rate is 2%.
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