Currency Options and Futures - 15 minutes

An investor has purchased a call option on British Pounds with a strike price of USD1.75/GBP and a premium of USD 0.07/GBP.

a. Complete the following table by finding the gain and the loss for each price. (10 points)

Possible Price of Stock A

Profit or Loss

USD1.90/GBP

USD1.85/GBP

USD1.82/GBP

USD1.75/GBP

USD1.50/GBP

b. Assume that the purchaser of the call option on British Pounds has also sold a forward contact on British Pounds with a settlement price of USD 1.85/GBP. Calculate her net profit for her position in both, the option and the forward if the spot prices were USD1.90/GBP and USD1.50/GBP. (6 points)

c. Fill in the blanks by indicating whether there is a positive relation (+) or negative relation (-) between the call option price and various variables. (6 points)