As a trader, you become bullish on the British pound and decide to speculate with currency options that will mature in December. Below are two options available:

Call option: Strike price = $1.60/£ and premium = $0.05/£

Put option: Strike price = $1.60/£ and premium = $0.04/£

Answer the following questions:

1. What type of options should you purchase: call or put option? Explain.

2. Based on your decision in part (1), calculate the net profit/loss when the spot rate at maturity is $1.70/£.

3. Based on your decision in part (1), calculate the net profit/loss when the spot rate at maturity is $1.75/£.

4. Based on your decision in part (1), calculate the net profit/loss when the spot rate at maturity is $1.55/£.

5. Calculate your break-even point.

Answer rating: 100% (QA)

Speculation with Currency Options As a trader you become bullish on the British pound and decide to ... View the full answer