A call option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.03 per unit. A put option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.02 per unit. You plan to purchase options to cover your future receivables of 700,000 pounds in 90 days. You will exercise the option in 90 days (if at all). You expect the spot rate of the pound to be $1.57 in 90 days. Determine the amount of dollars to be received, after deducting payment for the option premium.
A) $1,169,000.
B) $1,099,000.
C) $1,106,000.
D) $1,143,100.
E) $1,134,000.

Question

Quizplus · Accepted Answer

SOLUTION:($1.60 - $.02) × £700,000 = $1,106,000

A Call Option Exists on British Pounds with an Exercise