Speculating with Currency Options Barry Egan is a currency speculator. Barry believes that the Japanese yen will fluctuate widely against the U.S. dollar in the coming month. Currently, one-month call options on Japanese yen (Â¥) are available with a strike price of $0.0085 and a premium of $0.0007 per unit. One-month put options on Japanese yen are available with a strike price of $0.0084 and a premium of $0.0005 per unit. One option contract on Japanese yen contains Â¥6.25 million. (See Appendix B in this chapter) Describe how Barry could utilize these options to speculate on the movement of the Japanese yen. Assume Barry decides to construct a long strangle in yen. What are the break-even points of this strangle? What is Barry’s total profit or loss if the value of the yen in one month is $0.0070? What is Barry’s total profit or loss if the value of the yen in one month is $0.0090?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 5, Problem 35QA
Textbook Problem

Speculating with Currency Options Barry Egan is a currency speculator. Barry believes that the Japanese yen will fluctuate widely against the U.S. dollar in the coming month. Currently, one-month call options on Japanese yen (¥) are available with a strike price of $0.0085 and a premium of $0.0007 per unit. One-month put options on Japanese yen are available with a strike price of $0.0084 and a premium of $0.0005 per unit. One option contract on Japanese yen contains ¥6.25 million. (See Appendix B in this chapter)

  1. Describe how Barry could utilize these options to speculate on the movement of the Japanese yen.
  2. Assume Barry decides to construct a long strangle in yen. What are the break-even points of this strangle?
  3. What is Barry’s total profit or loss if the value of the yen in one month is $0.0070?
  4. What is Barry’s total profit or loss if the value of the yen in one month is $0.0090?

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