Question
Subject: International Finance Management Two months ago, Ronaldo sold a European call option on 20000 Canadian Dollars (CAD) with an expiration date of two months
Subject: International Finance Management
Two months ago, Ronaldo sold a European call option on 20000 Canadian Dollars (CAD) with an expiration date of two months and a premium of 0.002 Euro per unit and exercise price of 0.65 Euro. Similarly, Messi sold an American call option on 20000 Canadian Dollars (CAD) with the same exercise price, expiration date and a premium of 0.004 Euro per unit. Assume two months ago, the spot rate of CAD was 0.66, the two-month forward rate exhibited a discount of 3%, and the two-month futures price was the same as the two-month forward rate. From two months to today, there were 3 changes in the spot rate. 1 month before expiration, the CAD depreciated against Euro by 2 percent, and then CAD appreciated against Euro by 5 percent 15 days before expiration and again depreciated by 3 percent against Euro on the expiration date. Today the call option will be exercised if it is feasible to do so.
Question:
A. Determine the total amount of profit or loss in Euro from the position of Ronaldo and Messi in the call option. (Show necessary calculation and mention that the option will be exercised or not. Just calculation is not enough. Please mention your steps.)
Thanks in advance
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