Question

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	$0.00049/S$

Answer 1

a) Type of option to buy on Canadian dollars:

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 = $0.12451/C$