1) the buyer of a call-option has: a. absence of gain/loss b. absolute unlimited

Question

1) the buyer of a call-option has:

a. absence of gain/loss

b. absolute unlimited gain

c. potential unlimited gain

d. loss only

e. gain only

2) If the Indian subsidiary of a U.S. firm has net exposed assets of Rp 9,000,000 and the indian rupee drops in value from Rp 45.00/$ to Rp 50.00/$ the U.S. firms has a translation:

The answer is: Loss of $20,000. >>> BUT HOW? I need the STEPS

3) Purchaser of a currency option has what economic position:

a. Unlimited profit.

b. Unlimited loss

c. Limited ptofit

d. Limited loss

e. non of the above

Explanation / Answer

1. Buyer of a call option expects that the price of the stock shall rise and he gets the option to purchase a stock at a predetermined price, hence if the price of the stock shall rise he shall have gain. The price of stock may rise indefinitely hence he shall have unlimited gain.

So our answer shall be :

c. potential unlimited gain

2. U.S. firm net exposed assets = Rp 9,000,000

Value before fall in rate = Rp 45.00/$

Hence total fund in US $ before fall in exchange rate = Rp 9,000,000 / Rp 45.00 =$200000

Rate after fall in exchange = Rp 50.00/$

Hence value after fall in exchange rate = Rp 9,000,000 / Rp 50.00 =$180000

Loss = $200000-$180000 = $20000

3. Purchaser of a currency option shall not exercise the option unless the option will give him a gain so the maximum loss he has to bear is the cost of the option. So our answer should be :

d. Limited loss

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