Question
The dollar to the British pound is quoted at $1.1850/ today. Call options on the pound with an exercise price of $1.1820/ and expiration in
The dollar to the British pound is quoted at $1.1850/ today. Call options on the pound with an exercise price of $1.1820/ and expiration in three months are selling for $0.0382/. Each option contract calls for the exchange of 31,250. You start with $150,000 (plus or minus enough dollars to round to nearest whole contract).
a. If you buy the pound calls, how much premium do you pay per contract?
b. How many call contracts can you buy (adjust your answer given that you can add or subtract the needed amount)?
c. How much more money do you need to add to (or keep from) the $150,000 to round the number of contracts to the nearest whole number.
d. If in three months, the exchange rate is $1.2352/: i. Would you exercise? ii. Assuming you adjust the amount of money as per part c above, what would be your total payoffs? iii. What would be your total profits/losses?
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