Question

Cachita Haynes works as a currency speculator for Valtic Capital of Los Angeles. Her latest speculative position is to profit from her expectation that the U.S. dollar will rise significantly against the Japanese yen. The current spot rate is ¥120.00/$. She must choose between the following 90-day options on the Japanese yen:

Option	Strike Price	Premium
Put on yen	¥/$ 125	$/¥ 0.00003
Call on yen	¥/$ 125	$/¥ 0.00046

a) Should Cachita buy a put on yen or a call on yen?

ANSWER: Cachita should buy a put on yen to profit from the rise of the dollar (the fall of the yen)

c) Using your answer from part (a), what is Cachita's gross profit if the spot rate at the end of 90 days is ¥140.00/$ and she buys a contract of size ¥1,000,000? (Enter as U.S. dollars and round to two decimal places)

d) Using your answer from part (a), what is Cachita's net profit (including premium) if the spot rate at the end of 90 days is ¥140.00/$ assuming she buys a contract of size ¥1,000,000? (Enter as U.S. dollars and round to two decimal places)

Answer 1

Part (a)Gross profit or loss on put option
Cachita expects Yen to fall. So put option on yen has been taken. So we will calculate strike price and spot price for Yen.
Spot rate 1$ =		¥120.00	or	¥1.00	= 1/120 =	$0.008333
Strike price 1$ =		¥125.00	or	¥1.00	= 1/125 =	$0.008000
Premium on put option =		$0.00003	or
Total premium paid on contract = ¥1,000,000 * 0.00003
		$30.00
Spot rate at end of 90 days 1$ = 140			or	¥1.00	=1/140 =	$0.007143
Put option value at expiration are equal to Strike price minus spot rate, if Currency spot rate is less than strike price, option shall be exercised.
If spot rate is more than strike pirce, Option shall not be exercised. So value of put option shall be zero.
Value of Put option =   Strike price - Spot rate (Subject to 0)
	$0.008000	$0.007143
	$0.000857
Contract size is ¥1,000,000
So, Gross profit = 0.00086 * 1000000
	$857.14
	So, gross profit is $857.14
Net profit or loss on put option
Net profit = Gross profit - premium paid
	857.14 - 30
	$827.14
	So, Net profit is $827.14