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What will be profit or loss at the time of exercising

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Reference no: EM132554188

Assume that an investor wants to buy 7500 units of Pounds after 4 months. He does not know exact spot rate of Pound after four months, neither he has enough funds so that he may buy Pounds right now in order to avoid any loss after four months if Pound rate unexpectedly increase than what he speculates. However, speculation is the requirement of current situation. Therefore, he agrees to set strike price after 4 months that is normally below than currently prevailing price in market. Rate of Pound currently prevailing in Pakistani markets is Rs. 206 per Pound. However, strike price of Pound is Rs. 199 after 4 months. You have to pay Rs. 3.5 per Pound to purchase this option contract. At the end of 3 months, spot price of Pound reaches to Rs. 208.

Required:

Question a) What will be your profit or loss at the time of exercising the contract;

Question b) What will be profit or loss of seller

Question c) Describe whether you should exercise the contract or not?

Reference no: EM132554188

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