Question

Amanda works in the currency trading unit of Sumara Workers Bank in Togliatti, Russia. Her latest speculative position is to profit from her expectation that the U.S. dollar will rise significantly against the Japanese yen. The current spot rate is ¥120.00/USD$. She must choose between the 90-day options on the Japanese yen. The premium is 2.75 yen per USD. a. Should Amanda buy a put on yen or a call on yen? b. What is Amanda's break-even price on her option of choice in part a)? c. What is Amanda's gross profit and net profit if the end spot rate is 140 yen/$?

Answer 1

a.

If Amanda wants to make profit from expectation that the U.S. dollar will rise significantly against the japanese yen. She should buy either Call on U.S. dollar or Put on Japanese yen.

She only has option to choose on the Japanese yen, She need to buy a put on yen.

b.

Spot Price of Amanda = ¥120/$ i.e. $0.00833333/¥

Amanda’s break-even price of put option = Spot Price + Put Option Premium

                                                                  = ¥120 + ¥ 2.75

                                                                  = ¥122.75 per USD

Break even price as USD per Yen would be 1/122.75 = $0.00814664/¥

c.

At the end, spot rate is ¥140 per USD. When we express it as USD per YEN, it is 1/140 = $0.00714286/¥

So Amanda’s gross profit = 0.00833333 - 0.00714286 = $0.00119047

And Net profit = 0.00814664 - 0.00714286 = $0.00100378