Estimate the premium involved to trade these options

Assignment Help Financial Management

Reference no: EM131571353

On February 21st, 2017, your friend placed the following order on an online trading provider:

Short 10 European call currency option contracts on Australian dollars with maturity August 2017 and strike 0.8000

Short 20 European put currency options contracts on Australian dollars with maturity August 2017 and strike 0.7500. Each contract has a size of 10,000 Australian dollars.

On February 21st, 2017, the spot exchange rate was quoted at 0.7715 USD per Australian dollar, the US interest rate was 2.02% p.a. and the Australian interest rate was 2.88% p.a. with continuous compounding. The exchange rate volatility was 23% p.a..

a) Use the Black Scholes’s model to estimate the premium involved to trade these options. Did he pay or receive this premium?

b) Indentify the strategy that your friend used and provide the table and the diagram of the expected profit/loss generated by the strategy.

c) Discuss the profit and loss potential associated with this strategy. What was your friend’s expectation on market volatility and direction (bull or bear) when he placed the order?

d) Calculate the losses your friend would be making if he exercises in August 2017 when the spot exchange rate is 0.9250.

Reference no: EM131571353

Questions Cloud

Explain why the firm chooses this level of output : How much output will the firm choose to produce? Explain why the firm chooses this level of output.

Calculate the premium or discount on the note : Flounder Corporation, a publicly-traded company, agreed to loan money to another company. Calculate the premium or discount on the note

Identify one market where you think entry is easy : 1. Identify one market where you think entry is easy. Explain why? 2. How does that affect profits in that market?

Sex education in schools- should be halted or increased : Sex Education in Schools- Should be halted or Increased

Estimate the premium involved to trade these options : Use the Black Scholes’s model to estimate the premium involved to trade these options. Did he pay or receive this premium?

Create recommendations for interventions : Determine the first 5 interventions you would recommend to begin the change-management reorganization .

Create a financial model to support the requirements : Create a financial model to support the requirements outlined below. A basic P&L statement has been provided to you as a framework

Compute the cash balance at the end of the first year : Alpaca Corporation had revenues of $260,000 in its first year of operations. Compute the cash balance at the end of the first year for Alpaca Corporation

What is the value of the bond to you : Xerox issued bonds that pay $ 67.50 in interest. What is the value of the bond to you, first assuming that the interest is paid annually and then semiannually?

User Account

All Pages