Arthur Doyle is a currency trader for Baker Street, a private investment house in London. Baker Streets 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 $1.4260/. Arthur wishes to buy a put option on pounds which will yield the 25% return expected by his investors. 1. Compute the net profit ($/) for each put option assuming the pound does fall to $1.3200/ before expiration of the option. 2. Compute the return as a percentage of the premium for each put option. 3. What is the net profit $/) and return as a percentage of the premium for the 30-day options if the pound is at $1.4000/ after 30 days, and it takes 60 days for the pound to fall to $1.3200/? 4.Which of the following put options will produce the greatest return percentage of premium assuming the pound does fall to $1.3200/?
Strike Price		Maturity		Premium
$1.36/		30 days		$0.00081/
$1.34/		30 days		$0.00021/
$1.36/		60 days		$0.00333/
$1.34/		60 days		$0.00150/
Assumptions		Values
Current spot rate (US$/)		$1.4260
Expected endings spot rate in 30 to 60 days (US$/)		$1.3200
Potential investment principal per person ()		250,000.00