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Cece Cao trades currencies for Sumatra Funds in Jakarta. She focuses nearly all of her time...

Cece Cao trades currencies for Sumatra Funds in Jakarta. She focuses nearly all of her time and attention on the U.S. dollar/Singapore dollar ($/S$) cross rate. The current spot rate is $0.6000/S$. After considerable study, she has concluded that the Singapore dollar will appreciate versus the U.S. dollar in the coming 90 days, probably to about $0.7000/S$. She has the following options on the Singapore dollar to choose from:

Option Strike Price Premium
Put (US$/S$) 0.6500 0.00003
Call (US$/S$) 0.6500 0.00046

a) Should Cece buy a put on Singapore dollars or a call on Singapore dollars?

ANSWER: Since Cece expects the Singapore dollar to appreciate versus the U.S. dollar, she should buy a call on Singapore dollars. This gives her the right to buy Singapore dollars at a future date at $0.6500/S$ each, and then immediately resell them in the open market at $0.7000/S$ each for a profit. (if her expectation on the future spot rate proves correct.)

c) Using your answer from part (a), what is Cece's net profit (including premium) if the spot rate at the end of 90 days is indeed $0.7000/S$, and Cece buys an option for 1,000,000 Singapore dollars?

d) Using your answer from part (a), what is Cece's net profit (including premium) if the spot rate at the end of 90 days is $0.8000/S$ and Cece buys an option for 1,000,000 Singapore dollars?

Solutions

Expert Solution

Since Cece expects the Singapore dollar to appreciate versus the U.S. dollar, she should buy a call on Singapore dollars. This gives her the right to buy Singapore dollars at a future date at $0.6500/S$ each, and then immediately resell them in the open market at $0.7000/S$ each for a profit. (Assume expectation on the future spot rate proves correct.)

C) If spot rate is $0.7000/S$. Then call option will exercise. Then immediately resell them in the open market at $0.7000/S$ each for a profit of $0.0500 Cece buys an option for 1,000,000 Singapore dollars. So Net profit is (1,000,000 *0.05)= $50,000 -Premium amount.

Total Premium amount = 1,000,000 *0.00046 =$460

Total Net Profit = 50,000 - 460 = $49,540

d) If spot rate is $0.8000/S$. Then call option will exercise. Then immediately resell them in the open market at $0.8000/S$ each for a profit of $0.1500 Cece buys an option for 1,000,000 Singapore dollars. So Net profit is (1,000,000 *0.15)= $150,000 -Premium amount.

Total Premium amount = 1,000,000 *0.00046 =$460

Total Net Profit = 150,000 - 460 = $149,540

jeff jeffy answered 1 year ago
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