Question

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?
b. What is Callie's breakeven price on the option purchased in part (a)?
c. Using your answer from part (a), what is her gross profit and net profit (including premium) if the spot rate at the end of 90 days is $0.8400?
d. Using your answer from part (a), what is her gross profit and net profit (including premium) if the spot rate at the end of 90 days is $0.7850?

Answer 1

a) Callie believes that C$ will appreciate versus US dollars over the coming 90 days. Callie should buy a call on Canadian dollars.

As call option benefits from increase in the price of the underlying and hence if callie is of view that the C$ will appreciate, call option on C$ will give profits to the callie.

b) Callie breakeven price on the call option = Strike price + Premium

Breakeven price is the price at which there is no profit no loss .

Breakeven price here = 0.8000 + 0.0049 = $ 0.8049

c) If the spot rate after 90 days is $0.8400 the,

Gross profit = Max ( Stock Price - Strike price , 0)

= Max ( 0.8400 - 0.8000,0)

= $0.40000

Net Profit = Gross profit - premium

= 0.4000 - 0.0049

= $0.3951

d) If the spot rate after 90 days is $ 0.7850, the call option is out of the money is the spot price is less than the strike price . Callie wont exercise the option and let it expire.

Gross Profit = 0

Net Profit = 0 - 0.0049

= ($0.0049)