Question

The following information is currently available for Canadian dollar (C$) options
expiring in 3 months:
 Put option strike price = $.74.
 Put option premium = $.02 per unit.
 Call option strike price = $.76.
 Call option premium = $.01 per unit.
 The spot rate of C$ = $.75.
a. Determine the break-even point(s) for the purchaser of a Canadian dollar strangle.
b. What is the net profit (per unit) to the buyer of the Canadian dollar strangle if C$
appreciates by 12 percent in 3 months?
c. What is the net profit (per unit) to the seller of the Canadian dollar strangle if C$
appreciates by 12 percent in 3 months?
d. What is the net profit (per unit) to the buyer of the Canadian dollar straddle if C$
depreciates by 12 percent (in 3 months) if the put option also has a strike price of $.76?
e. What is the net profit (per unit) to the seller of the Canadian dollar straddle if C$
depreciates by 12 percent (in 3 months) if the put option also has a strike price of $.76?

Answer 1

Strangle Strategy: Assuming Long Strangle

1. Long  Call option Strike Price $.76.  premium = $.01 per unit
2. Long Put option Strike Price $.74. premium = $.02 per unit

Here Taking long of both Option

So Initial Cash flow for both will need to pay a premium for both Positions. Total premium Payable = Sum of Both Premium =  $.01 +   $.02 = $ 0.03

To Calculate options Breakeven we will draw pay off table and Pay off diagram :

• Here Pay off from  Long Call option Strike Price $.76. premium = When expiry price is Till $0.76 Its pay off will be -0.01 If expiry Price goes above  $0.76 Pay off will be  -0.01 + Difference between Strike and Expiry Price
• Here Pay off from Long Put option Strike Price $.74. premium =  When expiry price is Till $0.74 Its pay off will be -0.02 If expiry Price goes below $0.74 Pay off will be -0.02 + Difference between Strike and Expiry Price
• Total Pay off = Sum of ( Pay off from Long Put option Strike Price $.74. premium & Pay off from Long Call option Strike Price $.76. premium)

Pay off Diagram :

X Axis : Expiry Price

Y Axis : Total Pay off ( For Values refer pay off table)

Ans a)  break-even point(s) for the purchaser of a Canadian dollar strangle :

Points Where Total Pay off Become Zero : As per pay off table Expirty Price $ 0.79 and $ 0.71 become the break even point. (Ans)

Ans b)

Canadinan Dollar Appreciate by 12% = Means Maturity price become Spot Price * 1.12 = 0.74* 1.12 = 0.8288

• Here Pay off from  Long Call option Strike Price $.76. premium  = When expiry price is Till $0.76 Its pay off will be -0.01 If expiry Price goes above  $0.76  Pay off will be  -0.01 + Difference between Strike and Expiry Price = - 0.01 + (0.8288 - 0.76 ) = 0.0588
• Here Pay off from Long Put option Strike Price $.74. premium  =  When expiry price is Till $0.74 Its pay off will be -0.02 If expiry Price goes below $0.74 Pay off will be -0.02 + Difference between Strike and Expiry Price = - 0.02
• Total Pay off = 0.0588 - 0.02 = 0.0388

Net profit  to the buyer of the Canadian dollar strangle if C$ appreciates by 12 percent in 3 months will be  0.0388 (Ans)

Ans c)

As discussed in earlier if buyer made profit of  0.0388 for Canadian dollar strangle  Seller will made loss of 0.0388

Net profit to the Seller of the Canadian dollar strangle if C$ appreciates by 12 percent in 3 months will be - 0.0388 (Ans)

Ans d)

Canadinan Dollar Appreciate by 12% = Means Maturity price become Spot Price * ( 1 - 0.12)    = 0.74* ( 1 - 0.12) = 0.6512

• Here Pay off from  Long Call option Strike Price $.76. premium  = When expiry price is Till $0.76 Its pay off will be -0.01 If expiry Price goes above  $0.76  Pay off will be  -0.01 + Difference between Strike and Expiry Price = - 0.01
• Here Pay off from Long Put option Strike Price $.74. premium  =  When expiry price is Till $0.74 Its pay off will be -0.02 If expiry Price goes below $0.74 Pay off will be -0.02 + Difference between Strike and Expiry Price = - 0.02 + ( 0.74 - 0.6512) = 0.0688
• Total Pay off = 0.0688 - 0.01 = 0.0588

Net profit  to the buyer of the Canadian dollar strangle if C$ depreciates  by 12 percent in 3 months will be  0.0588 (Ans)

Ans e)

net profit (per unit) to the seller of the Canadian dollar straddle if C$ depreciates by 12 percent (in 3 months) if the put option also has a strike price of $.76?

As discussed in earlier if buyer made profit of  0.0388 for Canadian dollar strangle  Seller will made loss of 0.0588

Net profit to the Seller of the Canadian dollar strangle if C$ depreciates  by 12 percent in 3 months will be - 0.0588 (Ans)