Maggie Hawthorne is a currency speculator. She has noticed that recently the euro has appreciated substantially against the U$.$S$.$ dollar. The current exchange rate of the

euro is $$1\mathrm{.}17.$ After reading a variety of articles on the subject, she believes that the euro will continue to fluctuate substantially in the months to come. Although most

forecasters believe that the euro will depreciate against the dollar in the near future, Maggie thinks that there is also a good possibility of further appreciation. Currently,

a call option on euros is available with an exercise price of $$1\mathrm{.}22$ and a premium of $$0\mathrm{.}03.$ A euro put option with an exercise price of $$1\mathrm{.}22$ and a premium of $$0\mathrm{.}01$ is

also available. One option contract represents $62,500$ euro.

a$.$ Describe how Maggie could use straddles to speculate on the euro's value.

Since Maggie believes the euro will either appreciate or depreciate substantially, she may consider

a straddle on

b$.$ At option expiration, the value of the euro is $$1\mathrm{.}34.$ What is Maggie's total profit or loss from the straddle position chosen in part a$?$ Use a minus sign to enter

loss values, if any. Round your answer to the nearest dollar.

$

c$.$ What is Maggie's total profit or loss from the straddle position chosen in part a if the value of the euro is $$1\mathrm{.}06$ at option expiration? Use a minus sign to enter

loss values, if any. Round your answer to the nearest dollar.

$

d$.$ What is Maggie's total profit or loss from the straddle position chosen in part a if the value of the euro at option expiration is still $$1\mathrm{.}17?$ Use a minus sign to

enter loss values, if any. Round your answer to the nearest dollar.

$

e$.$ Given your answers to the questions above, when is it advantageous for a speculator to engage in a long straddle? When is it advantageous to engage in a

short straddle?

It is advantageous for a speculator to engage in a

$|$ straddle if the underlying currency is expected to fluctuate drastically, in either direction, prior to

option expiration. It is advantageous for a speculator to engage in a

$|$ straddle if the underlying currency is not expected to deviate far from the

strike price prior to option expiration.