Question

Cachita Haynes at Vatic Capital. Cachita Haynes works as a currency speculator for Vatic Capital of Los Angeles. Her latest speculative position is to profit from her expectation that the U.S. dollar will rise significantly against the Japanese yen. The current spot rate is ¥122.00/$. She must choose between the following 90-day options on the Japanese yen:

Option Strike Price Premium   

Put on yen ¥/$ 125   $/¥ 0.00003

Call on yen   ¥/$ 125   $/¥ 0.00046   

a. Should Cachita buy a put on yen or a call on yen?

b. What is Cachita's breakeven price on the option purchased in part (a)?

c. Using your answer from part (a), what is Cachita's gross profit and net profit? (including premium) if the spot rate at the end of 90 days is ¥140.00?/$ ?

Answer 1