A hedge fund manager anticipates a weaker euro over the next 180 days. Both six-month put and

Question:

A hedge fund manager anticipates a weaker euro over the next 180 days. Both six-month put and call options on the euro are available with strike price at the money of US$1.33 = €1.

a. Would you recommend the purchase of a put or a call option for speculative purposes?

b. Under what exchange rate scenario would the purchase of a put currency option result into a cash-flow profit?

c. Assuming that the option premium is US$0.02 per €, calculate the payoff at expiration of a put option with strike price at US$1.33 = €1 if the exchange rate at maturity stands at US$1.18 = €1.

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