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One year ago, you sold a call option on 1 million pounds with an expiration date of one year. You received a premium on the call option of $.02 per unit. The exercise price was $1.21. Assume that one year ago, the spot rate of the pound was $1.551, the one-year forward rate exhibited a premium of 4.5%, and the one-year futures price was the same as the one-year forward rate. From one year ago to today, the pound appreciated against the dollar by 3 percent. Today the call option will be exercised (if it is feasible for the buyer to do so).
a. Determine the total dollar amount of your profit or loss from your position in the call option.
b. Now assume that instead of taking a position in the call option one year ago, you sold a futures contract on 1 million pounds with a settlement date of one year. Determine the total dollar amount of your profit or loss.
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