Question Details

Profits from Using Currency Options 



1. Profits from Using Currency Options and Futures. On July 2, the two-month futures rate of the
Mexican peso contained a 2 percent discount (unannualized). There was a call option on pesos
with an exercise price that was equal to the spot rate. There was also a put option on pesos with an
exercise price equal to the spot rate. The premium on each of these options was 3 percent of the
spot rate at that time. On September 2, the option expired. Go to the oanda.com website (or any
site that has foreign exchange rate quotations) and determine the direct quote of the Mexican peso.
You exercised the option on this date if it was feasible to do so.
a. What was your net profit per unit if you had purchased the call option?
b. What was your net profit per unit if you had purchased the put option?
c. What was your net profit per unit if you had purchased a futures contract on July 2 that had a
settlement date of September 2?
d. What was your net profit per unit if you sold a futures contract on July 2 that had a settlement
date of September 2?


2. Speculating with Currency Straddles. Maggie Hawthorne is a currency speculator. She has
noticed recently that the euro has appreciated substantially against the U.S. dollar. The current
exchange rate of the euro is $1.15. After reading a variety of articles on the subject, she believes
that the euro will continue to fluctuate substantially in the months to come. Although most
forecasters believe that the euro will depreciate against the dollar in the near future, Maggie thinks
that there is also a good possibility of further appreciation. Currently, a call option on euros is
available with an exercise price of $1.17 and a premium of $.04. A euro put option with an
exercise price of $1.17 and a premium of $.03 is also available. (See Appendix B in this chapter.)
a. Describe how Maggie could use straddles to speculate on the euro- value.
b. At option expiration, the value of the euro is $1.30. What is Maggie- total profit or loss from
a long straddle position?
c. What is Maggie- total profit or loss from a long straddle position if the value of the euro is
$1.05 at option expiration?
d. What is Maggie- total profit or loss from a long straddle position if the value of the euro at
option expiration is still $1.15?
e. Given your answers to the questions above, when is it advantageous for a speculator to engage
in a long straddle? When is it advantageous to engage in a short straddle?


Business Management Assignment Help, Business Management Homework help, Business Management Study Help, Business Management Course Help