Determine the speculator profit

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Reference no: EM133185184

Question - The Option Speculator Mini-Case is designed to test your knowledge of speculation with currency options. The Option Speculator Mini-Case must be submitted and will be graded.

A speculator is considering the purchase of five three-month Japanese yen call options with a strike 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, profit (or loss) on the y-axis and future spot price on the x-axis.

2. Determine the speculator's profit if the yen appreciates to $1.00/100 yen.

3. Determine the speculator's profit if the yen appreciates only to the forward rate.

4. Determine the future spot price at which the speculator will only break even.

Reference no: EM133185184

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