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A call option on British pounds (£) exists with a strike price of $1.56 and a premium

Question:

A call option on British pounds (£) exists with a strike price of $1.56 and a premium of $.08 per unit. Another call option on British pounds has a strike price of $1.59 and a premium of $.06 per unit.
a. Complete the worksheet for a bull spread below.


A call option on British pounds (£) exists with a

b. What is the break-even point for this bull spread?
c. What is the maximum profit of this bull spread? What is the maximum loss?
d. If the British pound spot rate is $1.58 at option expiration, what is the total profit or loss for the bull spread?
e. If the British pound spot rate is $1.55 at option expiration, what is the total profit or loss for a bearspread?

Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.
Transcribed Image Text:

Value of British Pound at Option Expiration $1.60 $1.68 $1.59 $1.66 Cali 56 Call $1.59 Net

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a Value of British Pound at Option Expiration 150 156 159 165 Call 156 08 08 05 01 Call 159 06 06 06 ...View the full answer


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A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.

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