Question

1. A speculator is considering the purchase of five three-month Japanese yen call options with an exercise price of $0.0096 per yen. Each option contract is for 1,000,000 yens. The option premium is $0.000135 per yen. The spot price is $0.009528 per yen and the 90-day forward rate is $0.009571 per yen. What will be the speculator’s profit if the yen appreciates to $0.0100 per yen at option expiration? SHOW YOUR WORK

2. A speculator is considering the purchase of five three-month Japanese yen call options with an exercise price of $0.0096 per yen. Each option contract is for 1,000,000 yens. The option premium is $0.000135 per yen. The spot price is $0.009528 per yen and the 90-day forward rate is $0.009571 per yen. What will be the speculator’s loss if the yen appreciates to $0.009571 per yen? SHOW YOUR WORK

Answer 1

Call Option is the right to buy the underlying asset at a specified price on a future date

The options are exercised only when the market price at maturity is higher than the strike price.

Profit = (Market price - Exercise price - premium paid)*Number of options

Since the market price is higher, option will be exercised

Profit = (0.01 - 0.0096 - 0.000135)*1,000,000*5

= $1,325

b.The option will not be exercised since market price is lower

Loss = Premium paid

= -0.000135*1,000,000*5

= -$675