Tim Whatley is relatively new to the world of derivatives, having been involved with them only over the past 2-3 months. He is considering European calls and puts on the AUD/USD FX rate and asks his good friend Newman for advice.

Newman is a seasoned option trader and tells Tim that, if the level of the premium is his main concern, he could buy a European call and a European put options on the AUD/USD FX rate for the same premium, as long as he can find them with a strike price that equals the current Forward FX Rate.

Tim is puzzled as, despite his lack of experience he is very clear on the fact that call options and put options carry very different rights and obligations and, therefore, cannot agree with Tim's claim that they would trade at the same premium.

Who do you agree with and why? (You can assume that AUD/USD currency options are priced so that arbitrage opportunities are not available to Newman)

Answer rating: 100% (QA)

I agree with Tim that European call and put options on the AUDUSD FX rate with the same strike price ... View the full answer