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Cece Cao trades currencies for Sumatra Funds in Jakarta. She focuses nearly all of her time and

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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 $0.6000/S$. After considerable study, she has concluded that the Singapore dollar will appreciate versus the U.S. dollar in the coming 90 days, probably to about $0.7000/S$. She has the following options on the Singapore dollar to choose from:

Option_______________ Strike Price_________________Premium

Put on Sing $ ................$0.6500/S$...........................$0.00003/S$

Call on Sing $.....................$0.6500/S$...........................$0.00046/S$

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 $0.7000/S$?

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 $0.8000/S$?

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Given Data Option choices on the Singapore dollar ...View the full answer


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A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price. For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses. It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.

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