Question

Randy Rudecki purchased a call option on British pounds for $.02 per unit. The strike price was $1.45 and the spot rate at the time the option was exercised was $1.46. Assume there are 31,250 units in a British pound option. What was Randy‘s net profit on this option? Show your work.

Answer 1

Solution:

As per the information given in the question we have

Strike price of the call option = $ 1.45

Spot price on exercise date = $ 1.46      

Since the Strike Price is lesser than the spot price on exercise date, the call Option is said to be IN the money

(Since at the Strike price 1 pound can be purchased for a lesser price of  $ 1.45 , whereas as per the spot price on option exercise date 1 pound can be purchased for higher price of $ 1.46 )

Since the Option is IN the money the value of the option is

= Spot price on exercise date - Strike Price

= $ 1.46 - $ 1.45 = $ 0.01

Thus the value of the Option = $ 0.01

Further as per the information given in the question the call option is purchased for $ 0.02 per unit

Thus the profit on the call option = Value of the option – Purchase price of the option

= $ 0.01 - $ 0.02 = - $ 0.01

Since the Option contract size = 31,250 units

The overall profit on the contract is

= profit per call option * Option contract size

= - $ 0.01 * 31,250

= - $ 312.50

Thus the Overall net profit on the call option = - $ 312.50

Since the net profit is negative i..e, - $ 312.50, it can also be said that the net loss on the option is = $ 312.50