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 $.0085 and a premium of $.0007 per unit. One-month put options on Japanese yen are available with a strike price of $.0084 and a premium of $.0005 per unit. One option contract on Japanese yen contains ¥6.25 million. (See Appendix B in this chapter.)
a. Describe how Barry Egan could utilize these options to speculate on the movement of the Japanese yen.
b. Assume Barry decides to construct a long strangle in yen. What are the break-even points of this strangle?
c. What is Barry’s total profit or loss if the value of the yen in one month is $.0070?
d. What is Barry’s total profit or loss if the value of the yen in one month is $.0090?