Referring to problem 3, Prometheus Partners is considering currency options as alternative instruments to speculate on the possible demise of the euro. March 2013 European put and call options are available on the euro at a strike price $1.3700/€ with respective premiums of 2 and 3 percent.

a. How could a speculative bet be structured around March 2013 option contracts?

b. Explain what cash flows are involved and their timing. Show graphically the payoff profile of the option strategy that you recommend.

c. What are the differences between speculating with futures versus options?

Data from problem 3

A trader for Prometheus Partners—a macro hedge fund—is debating how to structure his bet that the euro-zone will break up in the next six to nine months, resulting in a massive capital flight into refuge currencies such as the Swiss franc. On October 17, 2013, March 2014 futures on the euro and the Swiss franc are available at US$1.3605/€ and US$1.1617/CHF.