Question

1. Assume the August call and put option on Swiss francs have the same strike price of 58½ ($0.5850/SF), and premium of $0.005/SF. In what price range the purchase of the PUT option would choose to exercise the option?

   		a) At all spot rates above the strike price of 58.5
   		b) At the strike price of 58.5
   		c) At all spot rates below the strike price of 58.5
   		d) At all spot rates below the 59 (strike price of 58.5 plus the premium)

2. At all spot rates above the strike price, the purchase of the CALL option would choose to?

   		a) do nothing
   		b) not exercise the option
   		c) to exercise or not - no difference
   		d) exercise the option

3. Andrea Cujoli is a currency speculator who enjoys “betting” on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Andrea thinks the yen will move to ¥128.00/$ in the next six months. Andrea should _______ to profit from changing currency values.

   		a) do nothing
   		b) buy dollar
   		c) sell yen
   		d) sell dollar

Answer 1

A)

Answer is C.At all spot rates below the strikes of 58.5

Breakeven rate=0.585-0.005=0.580
So I like to choose to exercise the PUT option

B)

Current spot price = ¥129.87/$

Assume Purchase value = $100,000 (x)

Purchase value (¥) = $100,000*spot price= ¥12,987,000

Sale value of yen ($) {calculated as yen value/exchange rate at the time of sale (¥128)}= ¥12,987,000/128= $101,460.94 (y)

Profit= (y)-(x)= $101,460.94-$100,000

= $1,460.94

Therefore, the correct option is C