Determine the speculator profit if the yen appreciates

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Reference no: EM132565157

The Option Speculator Mini-Case is designed to test your knowledge of speculation with currency options.

A speculator is considering the purchase of five three-month Japanese yen call options with a strike price of 96 cents per 100 yen. The premium is 1.35 cents per 100 yen. The spot price is 95.28 cents per 100 yen and the 90-day forward rate is 95.71 cents. The speculator believes the yen will appreciate to $1.00 per 100 yen over the next three months.

As the speculator's assistant, you have been asked to prepare the following:

Question 1: Diagram the call option, profit (or loss) on the y-axis and future spot price on the x-axis.

Question 2: Determine the speculator's profit if the yen appreciates to $1.00/100 yen.

Question 3: Determine the speculator's profit if the yen appreciates only to the forward rate.

Question 4: Determine the future spot price at which the speculator will only break even.

Reference no: EM132565157

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