A trader buys a call option. The call option gives him the right to buy AUD1 million at an exercise exchange rate of 0.9000 (USD/AUD). Calculate the trader's gross profit on expiry, assuming the exchange rate is 0.9200 at expiry.
A) -AUD20,000
B) +USD20,000
C) +AUD20,000
D) -USD20,000

Question

Quizplus · Accepted Answer

The trader can buy AUD1 million at 0.9000 USD/AUD when the market rate is 0.9200 USD/AUD, making a profit of 0.0200 USD/AUD. Multiplying the profit per AUD by 1 million gives a gross profit of USD20,000.

A Trader Buys a Call Option