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XYZ has sold British pound call options for speculative purposes. The option premium was $.06 per unit, and the exercise price was $1.58. XYZ will purchase the pounds on the day the options are exercised (if the options are exercised) in order to fulfill its obligation. In the following table, fill in the net profit (or loss) to XYZ if the listed spot rate exists at the time the purchaser of the call options considers exercising them.
Possible spot rate at the time
purchaser of Call Option
considers exercising them
$1.53
$1.55
$1.57
$1.60
$1.62
$1.64
$1.68
Suppose the real rate is 3.5 percent and the inflation rate is 5.1 percent. What rate would you expect to see on a Treasury bill?
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