Question

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Calandra Panagakos works for CIBC Currency Funds in Toronto.

Calandra Panagakos at CIBC.

Calandra Panagakos works for CIBC Currency Funds in Toronto. Calandra is something of a contrarian—asopposed to most of the forecasts, she believes the Canadian dollar (C$) will appreciate versus the U.S. dollar over the coming 90 days. The current spot rate is $0.6754/C$. Calandra may choose between the following options on the Canadian dollar:

Option	Strike Price	Premium
Put on C$	$0.7009	$0.00002/C$
Call on C$	$0.7009	$0.00048/C$

a. Should Calandra buy a put on Canadian dollars or a call on Canadian dollars?

b. What is Calandra's breakeven price on the option purchased in parta?

c. Using your answer from part a, what is Calandra's gross profit and net profit (including premium) if the spot rate at the end of 90 days is indeed $0.7602/C$?

d. Using your answer from part a, what is Calandra's gross profit and net profit (including premium) if the spot rate at the end of 90 days is$0.8248/C$?

Expert Solution

The computation is shown below:

(a) Because Calendar assumes that the Canadian dollar to increase against the US dollar. So Calandra buy a call on Canadian dollars.

(b) Break-even price of Calandra on part (a) = Strike price on call option + Premium on call option

= $0.7009 + $0.00048

=$0.70138

(c) Gross profit of calandra = Spot rate – Strike price

=$0.7602 – $0.7009

=$0.0593

Net profit of calandra = Spot rate – Strike price – Premium on call

=$0.7602 – $0.7009 - $0.00048

=$0.05882

(d) Gross profit of calandra = Spot rate – Strike price

=$0.8248 – $0.7009

=$0.1239

Net profit of calandra = Spot rate – Strike price – Premium on call

=$0.8248 – $0.7009 - $0.00048

=$0.12342

jeff jeffy answered 2 years ago

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