Question

Don works for the currency trading unit of a large bank in London. He speculates that in the coming months the dollar will rise sharply vs. the pound. What should Don do to act on his speculation?

Select one:

a. Buy a put on the pound.

b. Buy a call on the pound.

c. Sell a put on the pound.

d. Sell a call on the pound.

Answer 1

Correct option is a. Buy a put on the pound.

As Don is certain that pound would decrease in in value hence put option gives opportunity to earn for down side.

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Important note:

This question is bit confusing because question doesn’t say clearly that “Pound will fall” though it says dollar will rise vs Pound. Dollar can rise and pound can be static. In case when there is no movement assumed, Don can also sell put or he can sell call to earn fixed premium hence, in that case we are correct with c & d both of the options. Logically two options can’t be right at a time therefore we have to make an assumption that pound will fall and dollar will rise