Question
A speculator believes that the EURcurrently trading at 1.60will be trading in the range 1.70 - 1.80 in six months. She wishes to buy a
A speculator believes that the EURcurrently trading at 1.60will be trading in the range 1.70 - 1.80 in six months. She wishes to buy a EUR call option with a strike price of 1.70 so that at any value above 1.70, the option will have a positive payoff. However, because she does not believe that the EUR will trade above 1.80, she sells a EUR call option with a strike price of 1.80. Evaluate the consequences of the speculator's actions. Show potential consequences by constructing a spreadsheet. Discuss pros and cons of this strategy. Also assess whether this option combination is a better strategy than simply buying a EUR call with a strike price of 1.70.
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