A trader focuses principally on the Australian Dollar/Singapore Dollar (A$/S$) cross-rate. The current spot rate is S$0.8/A$.

The trader expects after 2 months the cross rate will be S$0.8/A$.

The trader plans to purchase an option, and has the following choices:

A CALL option on S$ has a strike price of S$0.82/A$ and a premium of A$0.00039/S$.

A PUT option on S$ has a strike price of S$0.80/A$ and a premium of A$0.00045/S$.

i. Determine if the trader should buy a PUT option or a CALL option on S$.

ii. If the trader buys the option decided in (i), determine net profit for the trader if the spot rate after 2 months is as the trader expects.

iii. If the spot rate after 2 months is not what the trader expected and is S$0.63/A$, will the option the trader buys be at-the-money, or in-the-money, or out-of-the-money?

Answer rating: 100% (QA)

To determine whether the trader should buy a PUT option or a CALL option on S we need to compare the ... View the full answer