Samuel Taragan is one of speculator currency trader who works for Clayton Big Capital in Chicago. His assistant provides the current data of currency movement. Currently he spotted the quoted currency option offered by his bank. He is really sure that the US dollar will rise significantly against the Japanese yen, and would like to take speculative position to gain from his expectation.

The current spot rate is ¥120.XY/$. Mr. Taragan must choose between the following 90-day options on the Japanese yen:

Option  Strike Price                             Premium

Put on yen       ¥125.35/$                    $0.00025/¥

Call on yen      ¥126.21/$                    $0.00048/¥

 

a. Should Taragan buy a put on yen or a call on yen?

b. What is Taragan's break-even price on the option purchased in part?

c. Using your answer from part (a), what is Taragan's gross profit and net profit (including premium) if the spot rate at the end of 90 days is ¥139/$?

Answer rating: 100% (QA)

a To gain from his expectation that the US dollar will rise significantly against the Japanese yen ... View the full answer