Willem is now writing put options on Swiss francs, puts with strike prices of 58.5 (cents/SF) as in Exhibit 5.3.

a. What in the world is he thinking? What is his precise directional view?

b. How far does the spot rate have to move in order for Willem to actually break even?

c. How would an increase in option volatility affect the option position he opened by writing the put options? How could he take advantage of the new higher premiums?

d. What is the limit to his profit potential?

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Exhibit 5.3 Profit and Loss for the Buyer and Writer of a Put Option on Swiss Francs with a Premium of $0.005/SF. Profit (U.S. cents/SF) Profit and loss for buyer of a put Strike price "In the money" "At the money" "Out of the money" +1.00 +0.50 Unlimited profit up to $0.580/SF Spot price of 57.5 58.0 58.5 59.0 59.5 60.0 underlying currency (U.S. cents/SF) Limited loss -0.50 -1.00 Break-even price Loss