Question
In: Finance
Arthur Doyle is a currency trader for Baker? Street, a private investment house in London. Baker?...
Arthur Doyle is a currency trader for Baker? Street, a private investment house in London. Baker? Street's clients are a collection of wealthy private investors? who, with a minimum stake of pound 240, 000 ?each, wish to speculate on the movement of currencies. The investors expect annual returns in excess of 25%. Although officed in? London, all accounts and expectations are based in U.S. dollars. Arthur is convinced that the British pound will slide significantly - possibly to $ 1.3200 - in the coming 30 to 60 days. The current spot rate is $ 1.4257. Arthur wishes to buy a put on pounds which will yield the 25?% return expected by his investors. Which of the following put options would you recommend he? purchase? Prove your choice is the preferable combination of strike? price, maturity, and? up-front premium expense.
|
Strike Price |
Maturity |
Premium |
||||
|
$ |
1.36 |
/£ |
30 days |
$ |
0.00081 |
/£ |
|
$ |
1.34 |
/£ |
30 days |
$ |
0.00021 |
/£ |
|
$ |
1.32 |
/£ |
30 days |
$ |
0.00004 |
/£ |
|
$ |
1.36 |
/£ |
60 days |
$ |
0.00333 |
/£ |
|
$ |
1.34 |
/£ |
60 days |
$ |
0.00151 |
/£ |
|
$ |
1.32 |
/£ |
60 days |
$ |
0.00061 |
/£ |
The return on investment? (ROI) at the strike price of ?$1.36
The return on investment? (ROI) at the strike price of $1.34
The return on investment? (ROI) at the strike price of $1.32
?
Solutions
Expert Solution
Calculation of strike price at 30 days out option
Return on investment at the strike price$1.36£ = (Current spot rate- Strike price- Premium paid)/Current spot rate * 365/Number of days
Return on investment at the strike price$1.36£ = (1.4257- 1.36- .00081)/1.4257*365/30=.5537 or 55.37%
Return on investment at the strike price$1.34£ = (1.4257-1.34- .00021)/1.4257*365/30=.7295 or 72.95%
Return on investment at the strike price$1.32£ = (1.4257-1.32- .00004)/1.4257*365/30= .9016 or 90.16%
Calculation of strike price at 60 days out option
Return on investment at the strike price$1.36£ = (Current spot rate- Strike price- Premium paid)/Current spot rate * 365/Number of days
Return on investment at the strike price$1.36£ = (1.4257- 1.36- .00333)/1.4257*365/60=.2661 or 26.61%
Return on investment at the strike price$1.34£ = (1.4257-1.34- .00151)/1.4257*365/60=.3592 or 35.92%
Return on investment at the strike price$1.32£ = (1.4257-1.32- .00061)/1.4257*365/60=.4484 or 44.84%
Purchase preference:
30 days put option at the strike price$1.32£ where ROI is 90.16%
60 days put option at the strike price$1.32£ where ROI is 44.84%
jeff jeffy answered 2 years agoRelated Solutions
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