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The current spot exchange rate between U.S. dollar and euro is $1.20/€ and a June 2020...

The current spot exchange rate between U.S. dollar and euro is $1.20/€ and a June 2020 call option on euro with a strike price of $1.21/€ commands a premium of $0.015/€. What is the intrinsic value of this option? What is the profit/loss if the option is exercised when the spot rate is $1.23/€ if the going interest U.S. interest rate is 2%?

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Answer #1

Call option is the right to buy a specified security at a specified price on a future date.

Intrinsic value = Market price - Exercise Price

= 1.20 - 1.21

i.e. $0, since value cannot be negative

Profit = Market price - Exercise Price - Premium paid

= 1.23 - 1.21 - 0.015

= $0.005

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