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18 March, 23:37

Citigroup sells a call option on Euros (contract size is €500,000) with a premium of $0.04 per euro. If the exercise price is $0.71 and the spot price at maturity date is $0.73, What is Citigroup's profit (loss) on the call option

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  1. 19 March, 01:42
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    Citigroup's profit on the call option = 10,000

    Explanation:

    Call option:

    It is an option contract in which the buyer has the right to buy a specified quantity of a security at a specified price within a fixed period of time.

    Formula for calculating premium:

    premium = call option * designated premium per euro

    premium = 5,00,000 * 0.04

    premium = 20,000

    Formula for calculating loss on exercise of the option:

    loss on exercise of the option = call option * (exercise price - spot price at maturity date)

    loss on exercise of the option = 5,00,000 * (0.73 - 0.71)

    loss on exercise of the option = 10,000

    Formula for calculating profit on the call option:

    Profit on the call option = premium - loss on exercise of the option

    Citigroup's profit on the call option = 20,000 - 10,000

    Citigroup's profit on the call option = 10,000

    Therefore, Citigroup's profit on the call option = 10,000
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