Find the Gain/Loss on options on expiry

Question

On 20 June, you bought two contracts of call option for euro with a strike price of $ 14000 at a premium of $ 0.07. The spot rate was $ 14500 per euro then. The option expires in six months time in July. One contract of options is for euro

125000. You are required to find -

Question 1: Premium payable by you:

a) $15,500

b) $17,500

c) $16,500

d) $17,000

Question 2:- Intrinsic value of the call option:

a) $1,000

b) $1,500

c) $500

d) Zero

Question 3:- Time value of the call option:

a) $0.06

b) $0.07

c) 30.05

d) $0.65

Question 4:- If on expiry, the spot price is $ 14500, and you exercise the option, what would be the gain/ Loss?

a) Gain of $12500

b) Gain of $ 7500

c) Loss of $ 8500

d) Loss of $5000

Question 5:- If on expiry, the spot price is $ 14500, and you do not exercise the option, what would be the gain/ loss?

a) Gain of $ 5500

b) Gain of $ 5500

c) Loss of $ 5000

d) Loss of $6000

Answer 1

The premium is the cost you pay to purchase the call option. Since one contract covers 125,000 euros and you bought two contracts, the total size is 250,000 euros. The premium per euro is $0.07, so the total premium is calculated as 250,000 × 0.07, which equals $17,500. This amount is the upfront cost of the option and is payable irrespective of whether you exercise the option later.