Question: The data below are extracts from the specifications and final settlement report for a call option on the US Dollar (USD). Maturity = 3 months

The data below are extracts from the specifications and final settlement report for a call option on the US Dollar (USD).

Maturity = 3 months

Type = American option

Contract size = USD 50,000

Strike rate = GHS 1.5120 / USD

Premium = GHS 0.0219 / USD

Required:

Distinguish between an American option and European option.

Suppose a speculator bought 5 of this call option and the spot rate closes at GHS1.4581 per USD on expiration. If the speculator exercises the option on the expiration date, how much would he lose or gain from the transaction?

Would you advise the speculator to exercise the option on the expiration date if the spot rate closes at GHS1.4581/USD? Explain with figures.

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