Question Details

Construct a contingency graph for a long euro 



1. Currency Bullspreads and Bearspreads. A call option on British pounds (₤) exists with a strike
price of $1.56 and a premium of $.08 per unit. Another call option on British pounds has a strike
price of $1.59 and a premium of $.06 per unit. (See Appendix B in this chapter.)
a. Complete the worksheet for a bullspread below.
Value of British Pound at Option Expiration
$1.50 $1.56 $1.59 $1.65
Call @ $1.56
Call @ $1.59
Net
b. What is the break-even point for this bullspread?
c. What is the maximum profit of this bullspread? What is the maximum loss?
d. If the British pound spot rate is $1.58 at option expiration, what is the total profit or loss for
the bullspread?
e. If the British pound spot rate is $1.55 at option expiration, what is the total profit or loss for a
bearspread?


2. Currency Straddles. Refer to the previous question, but assume that the call and put option
premiums are $.02 per unit and $.015 per unit, respectively. (See Appendix B in this chapter.)
a. Construct a contingency graph for a long euro straddle.
b. Construct a contingency graph for a short euro straddle.


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