Question Details

Barry believes that the Japanese yen will fluctuate widely against the U.S. dollar 



1. Speculating with Currency Options. Barry Egan is a currency speculator . Barry believes that the Japanese yen will fluctuate widely against the U.S. dollar in the coming month. Currently, onemonth
call options on Japanese yen (Â¥) are available with a strike price of $.0085 and a premium
Future spot
rate
$1.065 $1.13
$1.1
Future spot
rate
$1.065 $1.13
$1.1
-$.035
$1.065
-$1.065
$.035
of $.0007 per unit. One-month put options on Japanese yen are available with a strike price of
$.0084 and a premium of $.0005 per unit. One option contract on Japanese yen contains 6.25
million yen. (See Appendix B in this chapter.)
a. Describe how Barry Egan could utilize these options to speculate on the movement of the
Japanese yen.
b. Assume Barry decides to construct a long strangle in yen. What are the break-even points of
this strangle?
c. What is Barry- total profit or loss if the value of the yen in one month is $.0070?
d. What is Barry- total profit or loss if the value of the yen in one month is $.0090?


2. Currency Straddles. Reska, Inc., has constructed a long euro straddle. A call option on euros with an exercise price of $1.10 has a premium of $.025 per unit. A euro put option has a premium of
$.017 per unit. Some possible euro values at option expiration are shown in the following table.
(See Appendix B in this chapter.)
                                                     Value of Euro at Option Expiration
                                                    $.90       $1.05        $1.50            $2.00
Call
Put
Net
a. Complete the worksheet and determine the net profit per unit to Reska Inc. for each possible
future spot rate.
b. Determine the break-even point(s) of the long straddle. What are the break-even points of a
short straddle using these options?





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