Question

1. If a $0.05 premium were paid for a call option with a $1.15 strike price, under each of the following spot price scenarios of $1,12, $1.18, and $1.23, what would be the amount paid for 500,000 euros​?

Answer 1

Strike Price = $ 1.15, Premium = $ 0.05

Spot Price = $ 1.12, The option is out of money and hence 500000 EUR are bought at this spot price.

Therefore, Price Paid in $ = 500000 x 1.12 = 560000 $

Spot Price = $ 1.18, The option is in the money and hence 500000 EUR should have been bought at the strike price. However, adding the premium makes the actual buy price (1.15+0.05) = $ 1.2 which is greater than the spot price of $ 1.18

Therefore, Price Paid in $ 500000 = 1.18 x 500000 = $ 590000

Spot Price = $ 1.23

Price Paid in $ = 500000 x 1.15 + 0.05 x 500000 = $ 600000