33 Speculating with currency options. Barry Egan is a currency speculator. Barry believes that the Japanese yen will fluctuate widely against the euro in the coming month. Currently, one-month call options on Japanese yen (¥) are available with a strike price of 0.0085 euro and a premium of 0.0007 euro per unit. One-month put options on Japanese yen are available with a strike price of 0.0084 euro and a premium of 0.0005 euro per unit. One option contract on Japanese yen contains

¥6.25 million. (See Appendix 5B in this chapter.)

a Describe how Barry Egan could utilize these options to speculate on the movement of the Japanese yen.

b Assume Barry decides to construct a long strangle in yen. What are the breakeven points of this strangle?

c What is Barry’s total profit or loss if the value of the yen in one month is 0.0070 euro?

d What is Barry’s total profit or loss if the value of the yen in one month is $0.0090 euro?