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Excel File Edit View Insert Format Tools Data Window Help 25% D Tue 4:35 PM a Hwy 4-Module ll Transaction Exposure Search Sheet InsertPage Layout Formulas Data Review View Share ^ Share ^ Insert Delete , Format Wrap Text General Bookmarks , A, ] Merge & Center, $, % .co.00 Conditional Format Cell Formatting as Table Styles Paste B l U. -, Sort & Filter Sort & Filter Office Update To keep up-to-date with security updates, fixes, and improvements, choose Check for Updates. Check for Updates for Updates A16 1. You are speculating in the currency market. You buy a six month call on the Norwegian Krona for NOK 5.6831/$ (the current spot rate) for a premium of 2%. Krona moves to NOK 5.6800. Will you exercise the call option? a Data Table 4 Days s Call Option 6 Call Premium 7 Spot Rate in 6 months 180 5.6831 NOKIS 2% 5.68 NOKIS 15 19 21 23 Eskimo Mopeds Speculating Ready EI- 100% ReadyExplanation / Answer
Strike price of the call option = 5.6831 NOK
Six months down the line the spot price is 5.6800 NOK which means that the spot price is lower than the strike price of the call option.
A call option allows the buyer of the option to buy the underlying share at the strike price.
However here we see that the spot price in 6 months (5.6800 NOK) is lower than the strike price (5.6831 NOK). So it is unprofitable to exercise the option because you ending paying 5.6831 NOK when the spot is cheaper 5.6800NOK. Hence the call option will not be exercised.
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