Question

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 $0.8005​/S$?

Answer 1

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 = $0.15004/S$

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