Calculate what she would gain or lose

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Reference no: EM133377338

Question: Laura Wong would like to speculate that the U.S. dollar is going to weaken compared to the Swiss franc (SFR). She intends to use foreign currency options. She finds an options contract for the SFR62,500 (she can only afford to speculate on one contract). The most recent spot rate is $0.6400/SFR. The three-month forward rate is $0.6500/SFR. The premium for a put option on SFR for three months with a strike price of $0.6400/SFR ("at the money") is 1.0 cent per SFR. The premium for a three-month call option on SFR is 2.0 cents per SFR for the same strike price. Laura believes that the most likely range for the spot SFR in three months will be a low of $0.6000/SFR and a high of $0.6800/SFR. The most likely value, in her opinion, will be $0.6700/SFR. Ignore brokerage costs.

a. Diagram the profit and loss position from Laura Wong's perspective for both the put and the call options.

b. Calculate what she would gain or lose at her expected range of future spot prices and her most likely estimate of $0.6700/SFR.

c. Calculate and show on the diagram the breakeven future spot rate for the SFR.

d. Which strategy is most likely to lead to a speculative profit for Laura?

Reference no: EM133377338

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