Question
Cece Cao trades currencies for Sumatra Funds in Jakarta. She focuses nearly all of her time and attention on the U.S. dollar/Singapore dollar ($/S$) cross-rate.
| Cece Cao trades currencies for Sumatra Funds in Jakarta. She focuses nearly all of her time and attention on the U.S. dollar/Singapore dollar ($/S$) cross-rate. The current spot rate is $0.6000/S$. After considerable study, she has concluded that the Singapore dollar will appreciate versus the U.S. dollar in the coming 90 days, probably to about $0.7000/S$. She has the following options on the Singapore dollar to choose from: | |||||
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| Option |
| Strike Price |
| Premium | |
| Put on Sing $ |
| $0.6500/S$ |
| $0.00003/S$ | |
| Call on Sing $ |
| $0.6500/S$ |
| $0.00046/S$ | |
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| a. Should Cece buy a put on Singapore dollars or a call on Singapore dollars? |
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| b. What is Cece's breakeven price on the option purchased in part (a)? |
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| c. Using your answer from part (a), what is Cece's gross profit and net profit (including premium) if the spot rate at the end of 90 days is indeed $0.7000/S$? | |||||
| d. Using your answer from part (a), what is Cece's gross profit and net profit (including premium) if the spot rate at the end of 90 days is $0.8000/S$? | |||||
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