Question

# John, a speculator based in Ontario, believes that the Canadian dollar will increase in value against...

John, a speculator based in Ontario, believes that the Canadian dollar will increase in value against the U.S dollar in three months.

The spot rate currently is \$0.6750/C\$. He sees the following quotes for European options on Canadian dollars:

a) Should John buy a put option or call option on Canadian dollars?

b) What’s John’s breakeven price on the option purchased?

c) Calculate John’s gross profit and net profit (including premium) if after 3 months, the spot rate is \$0.7600/C\$

d) Calculate John’s gross profit and net profit if after 3 months, the spot rate is \$0.8250/C\$

 Option Strike Price Premium Put on C\$ \$0.7000 \$0.00003/S\$ Call on C\$ \$0.7000 \$0.00049/S\$

As Canadian \$ is expected to rise in value in the future period, Call option on C\$ have to be bought as call option has the right to buy the underlying at speficic price and period.

b) Breakeven price on the option purchased:

= Strike price + Premium paid

= 0.7000+0.00049

=\$0.70049/C\$

c) Calculation of gross profit and net profit:

Gross profit = Market price - strike price

= 0.7600-0.700

= \$0.0600

Net Profit = 0.0600-0.00049 = \$0.05951/C\$

d) Calculation of gross profit and net profit if after 3 months, the spot rate is \$0.8250/C\$:

Gross profit = 0.8250-0.700 = \$0.1250

Net Profit = 0.1250-0.00049 = \$0.12451/C\$

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