Question Details

Estimating Profits from Currency Futures 



1. Currency Strangles. The following information is currently available for Canadian dollar (C$)
options (see Appendix B in this chapter):
• Put option exercise price = $.75
• Put option premium = $.014 per unit
• Call option exercise price = $.76
• Call option premium = $.01 per unit
• One option contract represents C$50,000
a. What is the maximum possible gain the purchaser of a strangle can achieve using these
options?
b. What is the maximum possible loss the writer of a strangle can incur?
c. Locate the break-even point(s) of the strangle.

2. Estimating Profits from Currency Futures and Options. One year ago, you sold a put option on
100,000 euros with an expiration date of one year. You received a premium on the put option of
$.04 per unit. The exercise price was $1.22. Assume that one year ago, the spot rate of the euro
was $1.20, the one-year forward rate exhibited a discount of 2%, and the one-year futures price
was the same as the one-year forward rate. From one year ago to today, the euro depreciated
against the dollar by 4 percent. Today the put option will be exercised (if it is feasible for the
buyer to do so).
a. Determine the total dollar amount of your profit or loss from your position in the put option.

b. Now assume that instead of taking a position in the put option one year ago, you sold a futures
contract on 100,000 euros with a settlement date of one year. Determine the total dollar
amount of your profit or loss.



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