Question

In: Finance

Sallie Schnudel trades currencies for Keystone Funds in Jakarta. She focuses nearly all of her time...

Sallie Schnudel trades currencies for Keystone Funds in Jakarta. She focuses nearly all of her time and attention on the U.S. dollar/Singapore dollar ($/S$) cross-rate. The current spot rate is $0.6000/S$. After considerable study, she has concluded that the Singapore dollar will appreciate versus the U.S. dollar in the coming 90 days, probably to about $0.7000/S$. She has the following options on the Singapore dollar to choose from:                                                                                                                                                                   

Option                  Strike Price                        Premium

Put on Sing $                     $0.6500/S$                        $0.00003/S$

Call on Sing $                    $0.6500/S$                        $0.00046/S$

                                                           

  • 11.If the exchange rate is $0.7000/S$ at expiration, what is the profit (loss with negative sign) in $/S$ to buy an European Singapore dollar put?

a. 0.0495 b. 0.04997 c. 0.05003 d. -0.05046  e. -0.00003 f. -0.00046 g. +0.00003 h. -0.0495

  • If the exchange rate is $0.7000/S$ at expiration, what is the profit (loss is negative) in $/S$ to sell a European dollar call?

a. 0.04954 b. 0.04997 c. 0.05003 d. -0.05046 e. -0.00003 f. -0.00046 g. +0.00003   h. -0.04954

Solutions

Expert Solution

Buyer of put option :

If price on expiry is less than strike price, put will be exercised,otherwise not.

If put is exercised, payoff = strike price - price on expiry otherwise, payoff = 0

Profit = payoff - premium

Here, strike price = 0.65 and put premium =0.00003

Now price on expiry = 0.70 , so put will not be exercised, payoff = 0

Profit = payoff - premium = 0 -0.00003 = - 0.00003

Answer : e : - 0.00003

now in second case, call is sold

so seller will receive a premium, it is seller's income

payoff is zero, if price on expiry is less than strike price

otherwise negative payoff, payoff = strike price - price on expiry

strike price = 0.65 and Premium received on sell of call = 0.00046

now price on expiry is higher than strike price, so negative payoff

Payoff = strike price - price on expiry = 0.65 -0.70 = -0.05

Profit = payoff + premium = - 0.05 + 0.00046 = - 0.04954

Answer : h : - 0.04954


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