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Speculation with currency call options

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Reference no: EM132509712

Speculation with Currency Call Options

Currently, the spot rate is $1.28/£. As a trader, you believe that the British pound will appreciate significantly in the near future. You decide to speculate by buying a December call option with a strike price of $1.35/£ and a premium of $0.05/£. Please answer the following questions:

1. Explain briefly why buying a call option makes sense in this case.

2. How much is the intrinsic value of the option? And how much is the time value?

3. Please fill in the blanks of the table below.

Spot rate at maturity in December Exercise or not? Net profit Moneyness(ITM, ATM or OTM)

$1.20/£

1.25

1.30

1.35

1.40

1.45

Reference no: EM132509712

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