3 months ago when the spot rate between the US Pound (₤) was $1.31/£, you purchased a foreign exchange (FX) option contract for a right to buy £7000 with the strike price of $1.33/£ which expires today only when you can decide to exercise or not exercise the contract. You have paid $340 as the option premium (commission) for the contract. Suppose the spot rate on the expiration date, today, is $1.36/£, what will be your optimal decision for the contract (exercise or not exercise)? Please discuss below. (3 pts)

a) What type of the FX contract did you enter (American/European/call/put)?

b) Are you in the money or out of the money for the contract today? Explain why.

c) Do you want to exercise or not exercise the FX option contract today? Explain why or why not.

Answer rating: 100% (QA)

a The FX contract that was purchased is an American call option b You are i... View the full answer