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Suppose you are a speculator and you can buy or sell a 1 2 - month call option on euros with a strike price of
Suppose you are a speculator and you can buy or sell a month call option on euros with a strike price of and a call premium of $ Nominal
interest rates are per annum in the US and per annum in Europe. Inflation in the US and Europe is expected at and respectively. The current
spot rate is Euro options are for euros.
i
Graph the cash flow schedule from the perspective of the buyer and the seller.
ii
If your currency expectations are based on the International Fisher effect, would you buy or sell the option? What is your
expected speculative profit?
iii.
If your currency expectations are based strictly on relative PPP would you buy or sell the option? What is your expected
speculative profit?
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