Question
An investor has purchased United States dollar call options, with an exercise price of A$1.15 and a premium of A$0.03 per unit. (a) Calculate the
An investor has purchased United States dollar call options, with an exercise price of A$1.15 and a premium of A$0.03 per unit.
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(a) Calculate the break-even price.
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(b) Calculate the profit or loss of the option for the investor if the spot rate at the time the investor considers exercising the options is : (1) A$1.10 (2) A$1.17 (3) A$1.23.
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(c) What is the maximum loss for the investor?
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(d) Explain why the investor could have an unlimited profit if the options are exercised.
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(e) Explain in general the similarities of and differences between a currency call option and a currency put option.
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