Eric is an option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of $.02. If the spot rate at the option's maturity turns out to be $1.54, what is Eric's profit or loss per unit (assuming the buyer of the option acts rationally) ?

Question

Mercedes Bolton

Business

30 May, 19:08

Eric is an option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of $.02. If the spot rate at the option's maturity turns out to be $1.54, what is Eric's profit or loss per unit (assuming the buyer of the option acts rationally) ?

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Claudia Combs · Answer 1

Eric's profit or loss per unit is - $0.01 loss

Explanation:

For computing Eric's profit or loss per unit, first, we have to calculate the maturity loss or gain which is shown below:

Exercise price - spot rate

$1.54 - $1.51

$0.03

The $0.03 would reflect the Loss

Now the profit or loss per unit would be equal to

= Premium - loss

= $0.02 - $0.03

= - $0.01

The - $0.01 defines the loss per unit as the per unit is negative