| 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 | $ | | $ | | $ | | $ | | $ | | $ | | -
Choose the correct graph of the total net profit (i.e., cumulative profit less net initial cost, ignoring time value considerations) relationship using the June USD/GBP rate on the horizontal axis. -
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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. $ x |
