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Use the following information to determine the probability distribution of net gains per unit from purchasing a

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Use the following information to determine the probability distribution of net gains per unit from purchasing a call option on British pounds:

Use the following information to determine the probability distribution of net gains per unit from purchasing a call option on British pounds:

• Spot rate of the British pound = $1.45

• Premium on the British pound option = $.04 per unit

• Exercise price of British pound option = $1.46

• Your expectation of British pound spot rate prior to the expiration of option is:

Possible Outcome for Future Spot Rate $1.48 1.49 1.52 Probability 30% 40% 30%
Distribution
The word "distribution" has several meanings in the financial world, most of them pertaining to the payment of assets from a fund, account, or individual security to an investor or beneficiary. Retirement account distributions are among the most...
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Possible Outcome for Future Spot Rate $1.48 1.49 1.52 Probability 30% 40% 30%

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Financial Markets and Institutions

Financial Markets and Institutions

ISBN: 978-1337099745

12th edition

Authors: Jeff Madura

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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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