Citigroup sells a call option on Euros (contract size is €500,000) with a premium of $0.04 per euro. If the exercise price is $0.71 and the spot price at maturity date is $0.73, What is Citigroup's profit (loss) on the call option

Citigroup's profit on the call option = 10,000

Explanation:

Call option:

It is an option contract in which the buyer has the right to buy a specified quantity of a security at a specified price within a fixed period of time.

Formula for calculating premium:

premium = call option * designated premium per euro

premium = 5,00,000 * 0.04

premium = 20,000

Formula for calculating loss on exercise of the option:

loss on exercise of the option = call option * ( exercise price - spot price at maturity date )

loss on exercise of the option = 5,00,000 * ( 0.73 - 0.71 )

loss on exercise of the option = 10,000

Formula for calculating profit on the call option:

Profit on the call option = premium - loss on exercise of the option

Citigroup's profit on the call option = 20,000 - 10,000

Citigroup's profit on the call option = 10,000

Therefore, Citigroup's profit on the call option = 10,000