One of the non-USD FX exposures in Peters portfolio is JPY. Peter regularly adjusts his portfolios JPY
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Question:
One of the non-USD FX exposures in Peter’s portfolio is JPY. Peter regularly adjusts his portfolio’s JPY position based on his short-term forecast. Peter predicts JPY will appreciate by 4% against AUD over the next 90 days. The FX spot rate is 84.03 (1 AUD = 84.03 JPY). Peter is considering the following 90-day European options to increase JPY exposure in the following 90 days and simultaneously minimize his cash flow to create an option portfolio
- Choice 1: Buy call option on JPY with 87.72 strike price and Sell call with 89.84 strike price
- Choice 2: Buy call option on JPY with 84.03 strike price and Sell call with 87.72 strike price
- Choice 3: Buy call option on JPY with 84.03 strike price and Sell call with 89.84 strike price
Determine which Choice most likely satisfy Peter’s objective at expiration and justify why the OTHER TWO CHOICES are NOT suitable
Expert Answer:
If the JPY appreciates by 4 its price will be Spot rate14 8403 14 873912 Select Choice 2 If the exch... View the full answer
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