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Q5. LSU Corp. purchased Canadian dollar call options for speculative purposes. If these
options are exercised, LSU will immediately sell the Canadian dollars in the spot market.
Each option was purchased for a premium of $.03 per unit, with an exercise price of $.75.
LSU plans to wait until the expiration date before deciding whether to exercise the options.
Of course, LSU will exercise the options at that time only if it is feasible to do so. In the
following table, fill in the net profit (or loss) per unit to LSU Corp. based on the listed
possible spot rates of the Canadian dollar on the expiration date.
Solution:
Call option is exercised when 𝑺𝑻 > X
𝑺𝑻 Net profit or loss to the Buyer of the CALL option
possible Decision
spot rate at
expiration P = $.03; X = $.75
$.76 YES Net profit = (𝑺𝑻 − 𝑿) – P = ($.76 - $.75) - $.03 = -$.02
Net profit = (𝑺𝑻 − 𝑿) – P = ($.78 - $.75) - $.03 = -$.0.00; .78 is the
.78 YES Break-even Spot rate at expiration.
.80 YES Net profit = (𝑺𝑻 − 𝑿) – P = ($.80 - $.75) - $.03 = $.02
.82 YES Net profit = (𝑺𝑻 − 𝑿) – P = ($.82 - $.75) - $.03 = $.04
.85 YES Net profit = (𝑺𝑻 − 𝑿) – P = ($.85 - $.75) - $.03 = $.07
.87 YES Net profit = (𝑺𝑻 − 𝑿) – P = ($.87 - $.75) - $.03 = $.09