a$.$ Explain the conditions future spot exchange rate.

b$.$ Explain the purchasing power parity, both the absolute and relative versions. What causes the deviations from the purchasing power parity?

Question Five

A speculator is considering the purchase of five three$-$month Japanese yen call options with a striking price of $96$ cents per $100$ yen. The premium is $1\mathrm{.}35$ cents per $100$ yen. The spot price is $95\mathrm{.}28$ cents per $100$ yen and the $90-$Day forward rate is $95\mathrm{.}71$ cents. The speculator believes the yen will appreciate to $$1\mathrm{.}00$ per $100$ yen over the next three months. As the speculator's assistant, you have been asked to prepare the following:

a$.$ Diagram the call option.

b$.$ Determine the speculator's profit if the yen appreciates to $$\frac{1\mathrm{.}00}{100}$ yen.

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

d$.$ Determine the future spot price at which the speculator will only breakeven.

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