Solution: Use Equation (6-2) :
profit or loss = $1.67 - ($1.65 + $.04) = -$.02
Use the following information to answer the next three questions:
On October 23, the closing exchange rate of British pounds was $1.80. Calls which would mature the following January with a strike price of $1.85 were traded at $0.10.
29. The call options were .
A. in the money.
B. at the money.
* C. out of the money.
D. below the money.
E. above the money.
Solution: $1.80 - $1.85 = -$0.05
30. What is the intrinsic value?
A. -$.05.
B. $.05.
* C. $.00.
D. $.10.
E. $.50.
Solution: The mathematical value of the option is negative (-$0.05), but the intrinsic value is zero because it cannot be negative.
31. If the exchange rate of British pounds rises to $2.00 prior to the January option expiration date, what is the percentage return on investment for an investor who purchased a call on October 23?
A. 40%
B. 45%
* C. 50%
D. 55%
E. 70%
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