Question

What type of option would speculators buy if they expect euro to decline against dollar?

Explain possible gain/loss of holding such option contract, using payoff profile under different scenarios (Let the premium be $1000)

Answer 1

They will be buying the put option on Euro or call option on dollars,it will be helping in gaining on decline of Euro against Dollars because when Euro will be declining the call option on dollar will be increasing and put option on Euro will also be increasing.

Possible gain should be higher than premium paid becauseif the investor has to break even then it will have to be higher than the premium paid of $1000 because it will be helping the investor in order to have a better profits after breakpoint has been reached.

When we are purchasing the call option it will mean that the call options premium paid should be exceeded by the profits in order to have a benefits on the part of the the option buyer.

When we are purchasing the put option it will mean that the option price should be going down after deducting the premium of the strike price in order to make a gain.