Share
Explore BrainMass

Call and Put Option

4. A. Muncie Widget Inc. bought Euro call option for a strike price of $1.10 for March, 2007 paying 16.25 cents per unit. When they exercised the option, the spot price was $ 1.36. There are 62,500 units per Euro option.

i. What is the break-even point for this option ?
ii. Compute the total net profit/loss. What is the rate of return?

B. ABC corp. bought SF currency put option for April 2007, for a strike price of $0.8055 per SF. They paid a premium of 16.2 cents per unit. At the time when ABC corporation considered exercising the put, the spot price was $ 0.6125 per SF. There are 62,500 units in a SF currency option.

i. What is the break-even point for this option ?
ii. Is it worthwhile exercising this option? Compute the total net profit/loss and the rate of return.

Solution Preview

4. A. Muncie Widget Inc. bought Euro call option for a strike price of $1.10 for March, 2007 paying 16.25 cents per unit. When they exercised the option, the spot price was $ 1.36. There are 62,500 units per Euro option.

i. What is the break-even point for this option ?

X= Strike price= $1.10 /Euro
p= premium= $0.1625 /Euro
For break even point; gain on call option( = S-X) = p, where S is the Spot price at the time of exercise
or S= X+p= $1.2625 /Euro =1.1+0.1625

Answer: Break even ...

Solution Summary

Answers to two questions on payoffs for call and put option.

$2.19