Speculating with Long Currency Strangle:
A long currency strangle involves buying both a call option and a put option for a particular foreign currency with the same expiration date but with different strike prices. The most common type of strangle involves buying a put option with a lower strike price than the call option that is purchased. But other types are also possible. Suppose that a speculator predicts substantial volatility in the exchange rate of euro and so buys a long euro currency strangle with following terms and conditions:
Call option premium is $0.025 per unit.
Put option premium is $0.02 per unit.
Call option strike price is $1.10.
Put option strike price is $1.05.
One option contract represents €62,500.
Prepare a worksheet for the long currency strangle assuming that the future spot rate of euro at option expiration is $0.95, $1.00, $1.05, $1.10, $1.15, or $1.20 and show the net profit or loss per unit.
Construct a contingency graph for a long currency strangle and below the graph show the related net profit or loss to the straddle buyer?
Identify the future spot price(s) at which the strangle buyer makes no profit no loss (i.e., break-even point). Interpret your findings and draw implications for speculators.