Question
Have i answered 2,3 and 4 correctly? A speculator is considering the purchase of five three-month Japanese yen call options with a strike price of
Have i answered 2,3 and 4 correctly?
A speculator is considering the purchase of five three-month Japanese yen call options with a strike price of 96 cents per 100 yen. The premium is 1.35 cents per 100 yen. The spot price is 95.28 cents per 100 yen and the 90-day forward rate is 95.71 cents. The speculator believes the yen will appreciate to $1.00 per 100 yen over the next three months. As the speculator's assistant, you have been asked to prepare the following:
- Diagram the call option, profit (or loss) on the y-axis and future spot price on the x-axis.
- Determine the speculator's profit if the yen appreciates to $1.00/100 yen.
2.) 5*(1.0 - 0.9735) = 0.1325
- Determine the speculator's profit if the yen appreciates only to the forward rate.
3.) 5*(0.9571-0.9735) = -0.082. The option expires out of the money, the speculator will let the option expire worthless
- Determine the future spot price at which the speculator will only break even.
4.) Sr = E + C or .96+0.0135 = .9735 cents per 100 yen is the break even.
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