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Question - One year ago, Frank David sold a call option on 100,000 American dollars (USD) with an expiration date of one year. He received a premium on the call option of $.06 per unit. The exercise price was AUD1.2450/USD. Assume that, the spot rate of the USD at the date the option was sold was AUD1.2325/USD. At the same day, USD one-year forward rate exhibited a premium of 6%, and the one-year futures price was the same as the one-year forward rate. During the last year, USD has appreciated against the AUD by 7 percent. Today the buyer of call option expects to exercise the option.
Required -
-List the factors that affect currency put option premium.
-Determine the total dollar amount of Frank's profit or loss from his position in the call option.
-If Frank David sold a futures contract instead of taking a position in the call option one year ago, what would be his profit or loss?
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