Question

# Cece Cao trades currencies for Sumatra Funds in Jakarta. She focuses nearly all of her time...

Cece Cao trades currencies for Sumatra Funds in Jakarta. She focuses nearly all of her time and attention on the U.S.​ dollar/Singapore dollar​ (\$/S\$) cross rate. The current spot rate is \$0.6000​/S\$. After considerable​ study, she has concluded that the Singapore dollar will appreciate versus the U.S. dollar in the coming 90 ​days, probably to about \$0.7004​/S\$. She has the following options on the Singapore dollar to choose​ from:

 Option Strike Price Premium Put (US\$/Singapore dollar) 0.6500 0.00003 Call (US\$/Singapore dollar) 0.6500 0.00046

a. Should Cece buy a put on Singapore dollars or a call on Singapore​ dollars?

b. What is​ Cece's breakeven price on the option purchased in part​ (a)?

c. Using your answer from part​ (a), what is​ Cece's gross profit and net profit​ (including premium) if the spot rate at the end of 90 days is indeed \$0.7004​/S\$?

d. Using your answer from part​ (a), what is​ Cece's gross profit and net profit​ (including premium) if the spot rate at the end of 90 days is \$0.8005​/S\$?

a. Cece should buy a call option on Singapore dollars because she expects the S\$ to appreciate

b. Breakeven price = Strike Price + Premium paid

Breakeven price = 0.65 + 0.00046 = \$0.65046/S\$

c. Gross Profit = max(St - X, 0) = max(0.7004 - 0.65, 0) = \$0.0504/S\$

Net Profit = Gross Profit - Premium Paid = 0.0504 - 0.00046 = \$0.04994/S\$

d. Gross Profit = max(0.8005 - 0.65, 0) = \$0.1505/S\$

Net Profit = 0.1505 - 0.00046 = \$0.15004/S\$

Can you please upvote? Thank You :-)

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