Citigroup sells a call option on euros (contract size is €500,000) at a premium of $0.04 per euro. If the exercise price is $1.34 and the spot price of the euro at expiration is $1.36, what is Citigroup’s profit (loss) on the call option?
Contract size = €500,000, exercise price= $1.34, premium= $0.04/€,
Sn=$ 1.36/€ at expiration date
Seller of call option, because exercise price < Sn, exercise call option, profit= premium – (Sn- exercise price)= 0.04-($1.36 - $ 1.34)= $0.02 per euro. Total gain= $0.02 * €500,000 = $10,000
Graph the seller’s profit or loss for the call option described. What is the break-even spot exchange rate?