B) Stacey is a currency speculator. She believes that the Euro will fluctuate widely against the...

Transcribed Image Text:

B) Stacey is a currency speculator. She believes that the Euro will fluctuate widely against the U.S. dollar in the coming month. Currently, one-month call options on Euro are available with a strike price of $1.10 and a premium of $.025 per unit. One-month put options on Euro are available with a premium of $.017 per unit. One option contract on Euro contains 500,000 Euro. Required: ii) What type of derivative should Stacey enter into? Explain why she should choose this type of derivative. (2 marks) Construct a contingency graph representing Stacey's expected payoff on her chosen type of derivative if she takes a long position in this derivative. (in (i) above). (3 marks) B) Stacey is a currency speculator. She believes that the Euro will fluctuate widely against the U.S. dollar in the coming month. Currently, one-month call options on Euro are available with a strike price of $1.10 and a premium of $.025 per unit. One-month put options on Euro are available with a premium of $.017 per unit. One option contract on Euro contains 500,000 Euro. Required: ii) What type of derivative should Stacey enter into? Explain why she should choose this type of derivative. (2 marks) Construct a contingency graph representing Stacey's expected payoff on her chosen type of derivative if she takes a long position in this derivative. (in (i) above). (3 marks)