Question
A speculator is considering the purchase of one three-month call option on USD with an exercise price of 118 yen per U.S. dollar. The premium
A speculator is considering the purchase of one three-month call option on USD with an exercise price of
118 yen per U.S. dollar. The premium is 0.24 yen per U.S. dollar. The current spot price is 113.93 yen
per U.S. dollar and the 90-day forward rate is 115 yen/USD. The speculator believes the USD will
appreciate to $1.00 versus 126 yen over the next three months. As the speculators assistant, you have
been asked to prepare the followings:
1. Graph the profit/loss diagram of the call option in an Excel spreadsheet.
2. Determine the speculators profit if the USD appreciates to 126 yen/USD.
3. Determine the speculators profit/loss if the USD appreciates only to the forward rate.
4. Determine the future spot price at which the speculator will only break even.
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