Boreas wants to speculate on the value of the Swiss Franc which he believes is going to rise in value over the next 3 months. On the Philadelphia Stock Exchange, he finds December Swiss Franc call options with a strike rate of USD / CHF 1.23. The contract has a premium of 2c US and is of size 62,500 CHF.

The current spot price is 1.2390. The current forward rate is 1.2280

a) Are the options in or out of the money? What is the intrinsic value of the option? (careful) What is the time value of the option?

b) What is the percentage return to holding the option and the percentage return to holding the currency in the spot market if the final spot rates are (1) 1.2658, (2) 1.2048 or (3) 1.15?