A trader buys a call and a put option. The call option gives him the right to buy AUD1 million at an exercise exchange rate of 0.9000 (USD/AUD), whereas the put option gives him the right to sell AUD1 million at the same exercise exchange rate. If the exchange rate at expiry is 0.8500 will the trader exercise the options?
A) He will exercise both options
B) He will exercise the put but not the call option
C) He will exercise the call but not the put option
D) He will exercise neither option

Question

Quizplus · Accepted Answer

The trader will exercise the put option to sell AUD at the higher exercise rate of 0.9000, but will not exercise the call option because the market rate of 0.8500 is more favorable for buying AUD.

A Trader Buys a Call and a Put Option