Question

Suppose you, as a speculator, expect that the British pound will appreciate or depreciate substantially. Therefore,...

Suppose you, as a speculator, expect that the British pound will appreciate or depreciate substantially. Therefore, you long a straddle. Find out the profit or loss per contract (use the following information).

  • Call option premium: $0.03/₤, Put option premium: $0.025/₤
  • Strike price = $1.5/₤
  • One option contract size: ₤35,000.00
  • At expiration, the spot exchange rate is $1.3/₤
a.

$5,075
b.

$6,125
c.

$6,745
d.

$7,002
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Homework Answers

Answer #1

starddle strategy means buying call option and put option

Premium paid is = $ 0.03 + $ 0.25 = $ 0.055 per pound

Total premium paid = 35000*$ 0.055 = $ 1925

Spot exchange rate =$ 1.35 per pound

Strike price is = $ 1.5 per pound

Pay off for call option = Max ( stock price - strike price,0) = 1.3-1.5 = - .0.20 = 0

Pay off for put option = Max (Strike price - stock price ,0) =1.5-1.3 = 0.20

Total Gain Earned = 0.20*35000 - 1925 = $ 7000-1925 = $5075  

Answer is option A

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