ADMS 1000 Lecture Notes - Lecture 5: Call Option, Strike Price, Canadian Dollar

• School: York University
• Department: Administrative Studies
• Course: ADMS 1000
• Professor: Alan Shapiro

Document Summary

Suppose that linda was the seller of the call option purchased by jim. Suppose also that linda would purchase british pounds only if the option is exercised, at which time she must provide the pounds at the exercise price of . 40. Yet because it is possible for purchasers and sellers of options to close out their positions. The relationship described here will not hold unless both parties establish and close out their positions at the same time. An owner of a currency option may simply sell the option to someone else (before the expiration date) rather than exercising it. The owner could still earn a profit because the option premium changes over time to reflect the probability that the option will be exercised and the potential profit from exercising it. Linda would purchase british pounds only if the option is exercised, at which time she must provide the pounds at the exercise price of . 40.