Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of $.02. If the spot rate at the option's maturity turns out to be $1.54, what is Carl's profit or loss per unit (assuming the buyer of the option acts rationally)?
A) -$0.01.
B) $0.01.
C) -$0.04.
D) $0.04.
E) -$0.03.

Question

Quizplus · Accepted Answer

Carl's profit is the difference between the premium he received and the difference between the spot rate and the exercise price. In this case, the premium is $.02, the spot rate is $1.54, and the exercise price is $1.51. Therefore, Carl's profit is $.02 + ($1.54 - $1.51) = $.05.

Carl Is an Option Writer