Please explain how the exercisestrike price is determined In

Please explain how the exercise/strike price is determined.

In the 1980s, Bankers Trust developed inder currency option notes (ICONs). These are bonds in which the amount received by the holder at maturity varies with a foreig?n exchange rate. One example was its trade with the Long Term Credit Bank of Japan. The ICON specified that if the yen-U.S. dollar exchange rate, Sr, is greater than 169 yen per dollar at maturity (in 1995), the holder of the bond receives S1,000. If it is less than 169 yen per dollar, the amount received by the holder of the bond is 169 1,000 -max 0,1,000 When the exchange rate is below 84.5, nothing is received by the holder at maturity. Show that this ICON is is a combination of a regular bond and two options.

Solution

Strike Price or the exercise price is the price at which the option holder has to right to buy or to sell the security.

A option is of two types call or put, In case of put option a person has a right not the obligation to buy the specified security at a exercise price It is the right not the obligation. That means if a person wants then he has no need to exercise the contract. Similiarly in case of Put option a person has a right not obligation to sell the specified security in predetermined price or exercised price

Now comes to exercise price or strike price , The exrecise price or then strike price is determined on the basis of the amount who have to spend on the option premiums Generally it is the sum of FV of Current spot rate of security with a specified percentage and the option premiums.

Here in the given equation it is determined that if the exercise price is favourable to the option taker then he can earn unlimited money in case of call option and if it is unfavourable to him the loss is maximum to the amount of the premium paid. As in the given equation if the price is go more than 169$ then fixed 1000$ he receives if it is less than that ten the amount received is less depending on the future spot prices