Question

In: Finance

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

Callie Halstein works for CIBC Currency Funds in Toronto. Callie is something of a contrarian --...

Callie Halstein works for CIBC Currency Funds in Toronto. Callie is something of a contrarian -- as opposed 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 $0.7692/C$. Callie may choose between the following options on the Canadian dollar: OptionStrike PricePremiumPut on C$$0.8000 $0.0030/S$Call on C$$0.8000 $0.0049/S$ a. Should Callie buy a put on Canadian dollars or a call on Canadian dollars?...

Calandra Panagakos works for CIBC Currency Funds in Toronto. Calandra is something of a contrarian—as opposed...

Calandra Panagakos works for CIBC Currency Funds in Toronto. Calandra is something of a contrarian—as opposed 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 $0.6746/C$. Calandra may choose between the following options on the Canadian dollar: Option Strike Price Premium Put on C$ $0.7006 $0.00004/C$ Call on C$ $0.7006 $0.00045/C$ a. Should Calandra buy a put on Canadian dollars or a...

5. Explain how a currency swap works, and what it achieves.

Investigate the housing crisis in Toronto over the past decade. Toronto Housing Causes Investigate Toronto Housing...

Investigate the housing crisis in Toronto over the past decade. Toronto Housing Causes Investigate Toronto Housing Causes and Impact Crisis. How to solve it? Visual Aids Graphics: charts, tables, graphs

Discuss the importance of the market for loanable funds and the market for foreign-currency exchange economic...

Discuss the importance of the market for loanable funds and the market for foreign-currency exchange economic growth.

The average person thinks of the currency in her wallet or funds in her account when...

The average person thinks of the currency in her wallet or funds in her account when she thinks of the word “money,” but economists think about the concept of money in a much broader sense. What are the key features something needs to possess to be considered money, and what are some examples of things that have been used as money historically? Bitcoin and other cybercurrencies are frequently in the news now; do you think they should be considered money?...

Describe in detail how a currency swap works. Be sure to discuss who might enter such...

Describe in detail how a currency swap works. Be sure to discuss who might enter such an agreement, why they might do so and the mechanics of settlement.

11-) Don works for the currency trading unit of a large bank in London. He speculates...

11-) Don works for the currency trading unit of a large bank in London. He speculates that in the coming months the dollar will rise sharply vs. the pound. What should Don do to act on his speculation? Select one: a. Sell a put on the pound. b. Buy a put on the pound. c. Buy a call on the pound. d. Sell a call on the pound. 12-) Interest spreads in the eurocurrency market are small for many reasons...

1- An MNC has an incentive to invest short-term funds in a foreign currency if investments...

1- An MNC has an incentive to invest short-term funds in a foreign currency if investments denominated in the foreign currency have a ___(higher OR lower) interest rate than investments denominated in the home currency of the MNC. True or False: If a currency’s LIBOR rate rises, the money market interest rates denominated in that currency also rise. True False 2- True or False: Short-term loans of six months or less, extended by banks to MNCs in Europe, are called eurocredit...

M1 includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the...

M1 includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. Seasonally adjusted M1 is calculated by summing currency, traveler's checks, demand deposits, and OCDs, each seasonally adjusted separately. The...