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Tony Smith believes that the price of a particular underlying, currently selling at $93, will increase substantially

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Tony Smith believes that the price of a particular underlying, currently selling at $93, will increase substantially in the next six months, so he purchases a European call option expiring in six months on this underlying. The call option has an exercise price of $95 and sells for $1.50.
a) How much is the current credit risk, if any?
b) How much is the current value of the potential credit risk, if any?
c) Which party bears the credit risk(s), Tony Smith or the seller?
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A The current credit risk is 0 It is so because European option cannot be ex...View the full answer


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A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.

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