currency futures and option question | Browse Homework

1.A trader at Morgan Stanley becomes very bearish on the U.S. dollar after hearing the news that the U.S. trade deficit is deteriorating. He expects the euro to appreciate significantly against the dollar in the near future. Currently, the euro is trading for $1.20 in the spot market and $1.22 in the June futures. Each euro futures contract has 125,000 euros. Please answer the following questions.
1)Should he buy or sell the December futures?
2)Suppose that he holds the futures position for one week and then close out at $1.26/euro. How much is the profit per contract based on the decision in 1)?
3)Suppose that he holds the futures position for one week and then close out at $1.16/euro. How much is the profit per contract based on the decision in 1)?
2. Assume you have purchased a June call option on British pounds: the strike price is $1.30/£; the option premium is $0.10/£; and it is European style.
1)Please fill up the blanks in the table.
Spot rate at maturity (in June)
Exercise or not?
Net profit or payoff
1.15
1.20
1.25
1.30
1.35
1.40
1.50
1.60
2)Where is the break-even point?
3)Please draw the payoff diagram to illustrate the payoff. Make sure to mark down the strike price, the break-even point, and the moneyness (in the money, at the money, and out of the money) on the diagram.
2. Assume you have purchased a June put option on British pounds: the strike price is $1.30/£; the option premium is $0.10/£; and it is European style.
1)Please fill up the blanks in the table.
Spot rate at maturity (in June)
Exercise or not?
Net profit or payoff
1.10
1.15
1.20
1.25
1.30
1.35
1.40
1.45
2)Where is the break-even point?
3)Please draw the payoff diagram to illustrate the payoff. Make sure to mark down the strike price, the break-even point, and the moneyness (in the money, at the money, and out of the money) on the diagram.