eBook Problem 16 08 In March, a derivatives dealer offers you the following quotes for June British pound option contracts (expressed in U S dollars per GBP) MARKET PRICE OF CONTRACT Contract Strike Price Bid Offer Call USD1 40 0 0640 0 0646 Put 0 0240 0 0246 Call USD1 44 0 0413 0 0419 Put 0 0410 0 0416 Call USD1 48 0 0240 0 0246 Put 0 0640 0 0646 Assuming each of these contracts specifies the delivery of GBP 31,300 and expires in exactly three months, complete a table similar to the following (expressed in dollars) for a portfolio consisting of the following positions Long one 1 44 call Short one 1 48 call Long one 1 40 put Short one 1 44 put Do not round intermediate calculations Round your answers to the nearest cent Enter the net initial costs as negative values Use a minus sign to enter negative values If the answer is zero, enter 0 June USD GBP Net Initial Cost Long Call 1 44 Profit Short Call 1 48 Profit Long Put 1 40 Profit Short Put 1 44 Profit Total Net Profit $1 36 $ $ $ $ $ $ $1 40 $ $ $ $ $ $ $1 44 $ $ $ $ $ $ $1 48 $ $ $ $ $ $ $1 52 $ $ $ $ $ $ What is the breakeven point Do not round intermediate calculations Round your answer to four decimal places $ What is the nature of the currency speculation represented by this portfolio The position resembles a Select bearbullbutterflyItem 33 spread The purchaser of this portfolio predicts a moderate Select risefallItem 34 of the USD GBP rate If in exactly one month (i e , in April) the spot USD GBP rate falls to 1 380 and the effective annual risk free rates in the United States and England are 5 5 and 6 5 , respectively, calculate the equilibrium price differential that should exist between a long 1 44 call and a short 1 44 put position (Hint Consider what sort of forward contract this option combination is equivalent to and treat the British interest rate as a dividend yield ) Assume that exactly 2 months left to expiration of the options Do not round intermediate calculations Round your answer to four decimal places Use a minus sign to enter a negative value, if any $

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eBook Problem 16-08 In March, a derivatives dealer offers you the following quotes for June British pound option contracts (expressed in U.S. dollars per GBP):

eBook

Problem 16-08

In March, a derivatives dealer offers you the following quotes for June British pound option contracts (expressed in U.S. dollars per GBP):

		MARKET PRICE OF CONTRACT
Contract	Strike Price	Bid	Offer
Call	USD1.40	0.0640	0.0646
Put		0.0240	0.0246
Call	USD1.44	0.0413	0.0419
Put		0.0410	0.0416
Call	USD1.48	0.0240	0.0246
Put		0.0640	0.0646

Assuming each of these contracts specifies the delivery of GBP 31,300 and expires in exactly three months, complete a table similar to the following (expressed in dollars) for a portfolio consisting of the following positions:

Long one 1.44 call
Short one 1.48 call
Long one 1.40 put
Short one 1.44 put

Do not round intermediate calculations. Round your answers to the nearest cent. Enter the net initial costs as negative values. Use a minus sign to enter negative values. If the answer is zero, enter "0".

June USD/GBP	Net Initial Cost	Long Call 1.44 Profit	Short Call 1.48 Profit	Long Put 1.40 Profit	Short Put 1.44 Profit	Total Net Profit
$1.36	$	$	$	$	$	$
$1.40	$	$	$	$	$	$
$1.44	$	$	$	$	$	$
$1.48	$	$	$	$	$	$
$1.52	$	$	$	$	$	$

What is the breakeven point? Do not round intermediate calculations. Round your answer to four decimal places.

$

What is the nature of the currency speculation represented by this portfolio?

The position resembles a -Select-bearbullbutterflyItem 33 spread. The purchaser of this portfolio predicts a moderate -Select-risefallItem 34 of the USD/GBP rate.
If in exactly one month (i.e., in April) the spot USD/GBP rate falls to 1.380 and the effective annual risk-free rates in the United States and England are 5.5% and 6.5%, respectively, calculate the equilibrium price differential that should exist between a long 1.44 call and a short 1.44 put position. (Hint: Consider what sort of forward contract this option combination is equivalent to and treat the British interest rate as a dividend yield.) Assume that exactly 2 months left to expiration of the options. Do not round intermediate calculations. Round your answer to four decimal places. Use a minus sign to enter a negative value, if any.

$