Baker Street. 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.

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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/