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Question 4: Steve Davies works as a currency speculator for Citizen Securities of London. His latest speculative position is to profit from his expectation that
Question 4: Steve Davies works as a currency speculator for Citizen Securities of London. His latest speculative position is to profit from his expectation that the US$ will rise significantly against the Japanese Yen. The current spot rate is Yen 120.00 / US$. He must choose between the following 90-day currency options on the Japanese Yen: Call Option on Yen Put Option on Yen Strike Price (Yen / US$) 125.00 125.00 Strike Price (US$ / Yen) US$ 0.00800 US$ 0.00800 Option Premium (US$ / US$ 0.00046 US$ 0.00003 Yen) a) Should Steve buy a call or a put on Yen? Explain your choice. (4 marks) b) What is Steve's break-even price on his choice of option in part a)? (3 marks) c) What is his gross profit and net profit if the spot rate when the option matures is 140 Yen/US$
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