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Financial markets practice questions List the factors that affect call option premiums and briefly explain the relationship that exists for each. Do you think an
Financial markets practice questions
- List the factors that affect call option premiums and briefly explain the relationship that exists for each. Do you think an at-the-money call option in Rand has a higher or lower premium than an at-the-money call option in Kwacha (assuming the expiration date and the total dollar value represented by each option are the same for both options)? (10 Marks)
- Floro Corp purchased call options for speculative purposes. If these options are exercised, Floro Corp will immediately sell the Kwachas in the spot market. Each option was purchased for a premium of k3 per unit, with an exercise price of k81. Floro Corp plans to wait until the expiration date before deciding whether to exercise the options. Of course, Floro Corp will exercise the options at that time only if it is feasible to do so. In the following table, fill in the net profit (or loss) per unit to Floro Corp. based on the listed possible spot rates of the Kwacha on the expiration date.
- Provide the answers in the Net Profit (Loss) per unit to Floro Corp Column. (10 Marks)
Possible Spot Rate of Kwacha on expiration date | Net Profit (Loss) per unit to Floro Corp. |
k 76 | |
K78 | |
K80 | |
K82 | |
K85 | |
K87 |
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