Question Details

Speculating with Currency Call Options. LSU Corp. purchased Canadian dollar 



1. Currency Call Option Premiums. List the factors that affect currency call option premiums and
briefly explain the relationship that exists for each. Do you think an at-the-money call option in
euros has a higher or lower premium than an at-the-money call option in Mexican pesos (assuming
the expiration date and the total dollar value represented by each option are the same for both
options)?
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2. Speculating with Currency Call Options. LSU Corp. purchased Canadian dollar call options for
speculative purposes. If these options are exercised, LSU will immediately sell the Canadian
dollars in the spot market. Each option was purchased for a premium of $.03 per unit, with an
exercise price of $.75. LSU plans to wait until the expiration date before deciding whether to
exercise the options. Of course, LSU will exercise the options at that time only if it is feasible to
do so. In the following table, fill in the net profit (or loss) per unit to LSU Corp. based on the
listed possible spot rates of the Canadian dollar on the expiration date.