A small American company wishes to lock in an exchange rate in British pounds for purchases it will make in several months. It buys 3 option call contracts (each worth 10,000 GBP) to buy the pound at rate of $1.20 per GBP in a specified time in the future. The premium to purchase the call is 3 cents ($0.03) per GBP or $300 per 10,000 GBP contract.

If the exchange rate is $1.24 per GBP, will the option be exercised? Why or why not? Both whether or not the contract is exercised and the "why or why not" must be correct. Choose the best answer.

A. No, the option will not be exercised. The option is out of the money, as $1.24 per GBP is greater than the $1.20 per GBP exercise price and the $0.03 premium. B. Yes, the option will be exercised because the company will be refunded its premium since the exchange rate went above $1.23 per GBP. Therefore, the company will make $0.04 per pound on the options contracts.

C. Yes, the option will be exercised. The company actually will have spent a penny less per pound on the transaction than it would at the current exchange rate, as $1.24 per GBP is more than $1.20 per GBP at the exercise price combined with the $0.03 premium.

D. No, the option will not be exercised because the company would rather receive $1.24 per GBP than $1.20 per GBP.