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Call Option

. You are based in Canada. A 1yr call option to buy USD at strike1.3500 CAD/USD has premium of .0595CAD. Spot CAD/USD is 1.3535.
a) What is the moneyness of the call? What is its intrinsic value and time value?
b) Everything being equal, if the option has a life of 6M, is the call option going to cost more or less?
c) Everything else being equal, if USD interest rate rises, how do you expect the call change?
d) After 1yr, CAD/USD is 1.2500. What is the total profit/loss of the call option?

Solution Preview

a) The moneyness of call is that it would lead to a positive cash flow to the holder if it were exercised immediately.
Currently, if I exercise the call I can buy the USD for 1.3500 CAD, which is cheaper than the spot price of 1.3535 CAD. So by ...

Solution Summary

Call Option is highlighted.