Suppose that you expect the US$ value relative to the Euro to change dramatically over the...

Suppose that you expect the US$ value relative to the Euro to change dramatically over the next few months, and in particular leading up to the US general election. In your opinion, there is an equal probability that this change can be positive ($ appreciation) or negative ($ depreciation). How can you devise a trading strategy that is tailored along your convictions? Show in a graph (or with a detailed explanation) how that strategy will work and explain the potential pitfalls, if any

Expert Solution

ANswer The effective stratergy here would be straddle i.e to go long (buy) both a call option and a put option with same strike price and same expiry date. Let us assume current rate is 0.90 Euro per $. This rate is expected to either increase or decrease with equal probability. We buy a call option with strike price 0.90 Euro and a put option wil strike price 0.90 (The lot size is 1000 euro). The premium were $ 10 for call option and $ 10 for put option

The potential pitfall in this stratergy is that if the stock price doent move significantly in either direction(i.e remain between 0.88 to 0.92), there will be loss

jeff jeffy answered 1 year ago

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Suppose that you expect the US$ value relative to the Euro to change dramatically over the...

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