finance-FIN525 International Financial Management

QUESTION

HW#6
FIN525 International Financial
Management
Fall/2015
Name__________________

I. Speculation with Currency
Options
As a trader, you become bullish on the British pound and
decide to speculate with currency options that will mature in December. Below
are two options available:
Call
option: Strike price = $1.60/£ and premium = $0.05/£
Put
option: Strike price = $1.60/£ and
premium = $0.04/£
Please answer the following questions:
1.
What type of options should you purchase: call
or put option? Please explain.

2.
Based on your decision in part 1, what is your
net profit/loss when the spot rate at maturity is $1.80/£?

3.
Based on your decision in part 1, what is your
net profit/loss when the spot rate at maturity is $1.75/£?

4.
Based on your decision in part 1, what is your
bet profit/loss when the spot rate at maturity is $1.65/£?

5.
Based on your decision in part 1, what is your
bet profit/loss when the spot rate at maturity is $1.55/£?

6.
Draw a diagram to illustrate the payoff. Make
sure to mark down the strike price, the break-even point, and the moneyness (in
the money, at the money, and out of the money) on the diagram.

II. Speculation with Currency
Options
As a trader, you become bearish on the British pound and
decide to speculate with currency options that will mature in December. There
are two options available:
Call
option: Strike price = $1.60/£, and premium = $0.05/£
Put
option: Strike price = $1.60/£, and
premium = $0.04/£
Please answer the following questions:
1.
What type of options should you purchase: call
or put option? Please explain.

2.
Based on your decision in part 1, what is your net
profit/loss when the spot rate at maturity is $1.45/£?

3.
Based on your decision in part 1, what is your
net profit/loss when the spot rate at maturity is $1.50/£?

4.
Based on your decision in part 1, what is your
net profit/loss when the spot rate at maturity is $1.56/£?

5.
Based on your decision in part 1, what is your net
profit/loss when the spot rate at maturity is $1.70/£?

6.
Draw a diagram to illustrate the payoff. Make
sure to mark down the strike price, the break-even point, and the moneyness (in
the money, at the money, and out of the money) on the diagram.

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