Question

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

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

Cece Cao in Jakarta. 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 $0.60000.6000 /S$. After considerable study, she has concluded that the Singapore dollar will appreciate versus the U.S. dollar in the coming 9090 days, probably to about $0.70020.7002 /S$ She has the following options on the Singapore dollar to choose from:.

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 $0.70020.7002 /S$?

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 $0.80040.8004 /S$

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Answer #1
Option Strike Price Premium
PUT(US$/ Singapore Dollar) 0.6500 .00003
CALL(US$/ Singapore Dollar) 0.6500 .00046

a. She should Buy a Call on Singapore Dollar because she is expecting that Singapore dollar will appreciate against US$ and this call option will give her the right to buy the Singapore dollar in future date at 0.6500 and selling them at 0.70020, making a profit.

b. Breakeven Price = Strike Price + Premium

Breakeven Price = $0.6500 + $0.00046 = $0.65046

c. Spot Price =$0.70020

Gross Profit = Spot Price - Strike Price

Gross Profit = $0.70020 - $0.6500 = $0.05020

Net Profit = Spot Price - Strike Price - Premium

Net Profit = $0.70020-$0.6500-$.00046 = $0.04974

d. Spot Price = $0.80040

Gross Profit = Spot Price - Strike Price

Gross Profit = $0.80040 - $0.6500 = $0.15040

Net Profit = Spot Price - Strike Price - Premium

Net Profit = $0.80040-$0.6500-$.00046 = $0.14994

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