Arthur Doyle is a currency trader for Baker Street, a private investment house in London. Baker Street's

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Arthur Doyle is a currency trader for Baker Street, a private investment house in London. Baker Street's clients are a collection of wealthy private investors who, with a minimum stake of £250,000 each, wish to speculate on the movement of currencies. The investors expect annual returns in excess of 25%. Although officed in London, all accounts and expectations are based in U.S. dollars.

Arthur is convinced that the British pound will slide significantly - possibly to $1.3200/£ - in the coming 30 to 60 days. The current spot rate is $1.4260/£. Arthur wishes to buy a put on pounds which will yield the 25% return expected by his investors. Which of the following put options would you recommend he purchase. Prove your choice is the preferable combination of strike price, maturity, and up-front premium expense.

Strike Price_____________Maturity__________Premium

$1.36/£........................30 days..............$0.00081/£

$1.34/£.........................30 days..............$0.00021/£

$1.32/£........................30 days..............$0.00004/£

$1.36/£........................60 days..............$0.00333/£

$1.34/£........................60 days..............$0.00150/£

$1.32/£........................60 days..............$0.00060/£

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Multinational Business Finance

ISBN: 978-0133879872

14th edition

Authors: David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett

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