FINA 3600 Minicase 2: Call options on USD Objective: Analyze the profit/loss and break-even point for a currency call option Due date: December 11th, 11:59 pm This minicase weighs 5% of your overall grade Requirements:

A speculator is considering the purchase of one three-month call option on USD with an exercise price of 146.70 JPY per USD. The premium is 3.65 JPY. The current spot price as of November 16, 2023 is 150.87 JPY per USD and the 90-day forward rate is 150.852 JPY per USD. The speculator believes that the U.S. dollar will appreciate against the JPY to 162 JPY per USD 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 162 JPY per USD. 3. Determine the speculators profit/loss if the USD depreciates to the forward rate. 4. Determine the future spot price at which the speculator will only break even. Please download Office 365 and install Excel in your desktop or laptop. Dont use Excel directly from OneDrive. It is because Excel graphical functions are not accessible from OneDrive. To draw the profit/loss diagram of a call option for Part 1, you will create a few rows with these headers: spot rate (x.xx JPY per USD), exercise price (146.70 JPY per USD), payoff for the call option, call premium (3.65 JPY), and profit/loss of the call option in Excel. After creating these headers, you will also create a few spot rates below and above the exercise price (146.70 JPY per USD). To calculate the payoff for the call option in Excel, you can use the max function: =max(Spot rate Exercise price, 0). The profit/loss of the long call is to subtract the call premium from the payoffs. Then highlighting the data points of profit/loss in the spreadsheet and choosing 2-D Line from Insert tab, you will create the profit/loss diagram for the call option. To create a nice graph, you will format data points on the horizontal axis to the corresponding spot rates. To do this, right click on horizontal axis, choose Select data, and edit horizontal axis labels. The currency unit on the vertical and horizontal axes is the JPY. You should also add a chart title.

For Parts 2 to 3, please show your calculations in Excel, which can be done in Part 1 if you have included these values in the spot rate. Please review chapter 7 powerpoint slides 16 and 17 and page 3 of supplemental class notes if you do not know how to compute the break-even rate. Please submit your Excel file before or by the due date on Blackboard.