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If you believe the Brazilian real will fall from the present spot rate of $0.2255 /...

If you believe the Brazilian real will fall from the present spot rate of $0.2255 / Brazilian real, which speculative strategywould yield the largest speculative gain?

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Answer #1

If we expect the Brazilian spot rates will fall in the future, buying a put option will be a good speculation strategy.

A put option gives the option buyer a righ to buy the underlying asset (brazilian currency) at a predetermined price (strike price) in the future in case the spot rate falls below the strike price. However, if the spot rate rises than the strike price, then the put option holder has no obligation to exercise his option of buying the asset, and as such the option shall lapse. Thus a put option provides downside gain with upward protection.

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