Question

atic Capital. Cachita Haynes works as a currency speculator for Vatic Capital of Los Angeles. Her latest speculative position is to profit from her expectation that the U.S. dollar will rise significantly against the Japanese yen. The current spot rate is ¥118.000 /$. She must choose between the following 90 -day options on the Japanese yen

Option   Strike Price (yen/$)   Premium ($/yen)
Put on yen   126   0.00003/¥
Call on yen   126   0.00046/¥

a. Should Cachita buy a put on yen or a call on yen?

b. What is Cachita's breakeven price on the option purchased in part a ? in dolars to yen format

c. Using your answer from parta , what is Cachita's gross profit and net profit (including premium) if the spot rate at the end of 90 days is¥140.00 in dollars to yen

Answer 1

put option -option to sell the underline asset

Here, strike price = 126 premium = 0.00003 i.e 0.00003*126 =0.00378

selling price = 118 ,so if he sells this asset ,he would incur loss of (126-118)+0.00378 ,because MP<EP(exercise price)

call option =option to buy the underline asset.

strike price = 126 premium = 0.00046*126 =0.05796

market price =118

So he would prefer to exercise the call option because he is getting profit of (126-118)-0.05796 because MP<EP(exercise price)