Question
3) A speculator is considering the purchase of five three-month Japanese yen call options with a striking price of 96 cents per 100 yen. The
3) A speculator is considering the purchase of five three-month Japanese yen call options with a striking price of 96 cents per 100 yen. The premium is 1.35 cents per 100 yen. The spot price is 95.28 cents per 100 yen and the 90-day forward rate is 95.71 cents. The speculator believes the yen will appreciate to $1.00 per 100 yen over the next three months. As the speculators assistant, you have been asked to prepare the following:
a) Graph the call option cash flow schedule.
b) Determine the speculators profit if the yen appreciates to $1.00/100 yen.
c) Determine the speculators profit if the yen only appreciates to the forward rate.
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