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. Calculate the trader's gross profit on expiry, assuming the exchange rate is 0.9100 at expiry.
A) -USD10,000
B) -AUD10,000
C) +AUD10,000
D) +USD10,000

Question

Quizplus · Accepted Answer

The trader will exercise the call option to buy AUD1 million at 0.9000 USD/AUD, as the market rate is 0.9100 USD/AUD. This results in a gross profit of (0.9100 - 0.9000) * 1,000,000 = USD10,000. The put option will not be exercised because the market rate is more favorable than the exercise rate for selling AUD.

A Trader Buys a Call and a Put Option