Individual Homework-1

Individual Homework-1 - Individual Homework: 40% of grade...

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Individual Homework: 40% of grade CHAPTER 7: Future and Option on Foreign Exchange MINI CASE: THE OPTIONS SPECULATOR A speculator is considering the purchase of five three-month Japanese yen call options with a striking 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: 1. Diagram the call option cash flow schedule. 2. Determine the speculator’s profit if the yen appreciates to $1.00/100 yen. 3. Determine the speculator’s profit if the yen only appreciates to the forward rate. 4. Determine the future spot price at which the speculator will only breakeven. ANSWER TO THE QUESTIONS OF THE OPTIONS SPECULATOR: We assume that the options speculator is an American-Style Call Option. The American option can be exercised at any time that a shorter term option can be exercised, or can also be at sometime later, it follows that the all else remaining the same. The longer term call option will be sold at a price at least as large as the shorter term ones. 1.
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Individual Homework-1 - Individual Homework: 40% of grade...

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