ADMS 1000 Lecture Notes - Lecture 13: Spot Contract, Call Option
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6 Jul 2018
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Contingency graph for the seller of a call option. At a future spot rate of . 51, the speculator would earn $. 01 per unit by exercising the option. If the future spot rate is . 51, then the seller would lose $. 01 per unit on the option transaction (paying . 51 for pounds in the spot market and selling pounds for . 50 to fulfill the exercise request). Yet this loss would be more than offset by the premium of $. 02 per unit received, resulting in a net gain of $. 01 per unit. The break-even price is therefore . 52, and the net gain to the seller of a call option becomes negative at all higher future spot rates. A future spot rate of . 51, the speculator would earn $. 01 per unit by exercising the option. Considering the $. 02 premium paid, however, the net gain would be $. 01.
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