Question

In: Finance

Is a put option on the ¥ with a strike price in €/¥ also a call...

Is a put option on the ¥ with a strike price in €/¥ also a call option on the € with a strike price in ¥/€? Explain.

Solutions

Expert Solution

The above statement is correct

Step 1 - Concept

1. First of all we have to understand the concept of base currency

If the rate is Euro / Yen base currency is Yen

If the rate is Yen / Euro base currency is Euro

2. depreciation in base currency also means appreciation in price currency

Step - 2 Put option on Yen with a strike price in Euro / Yen

Above option is a put option on Yen, ie the buyer of put option will make profit when yen depreciates (which also means euro appreciates)

Step - 3 Call option on Euro with a strike price in Yen / Euro

Above option is a call option on Euro, ie the buyer of call option will make profit when euro appreciates (which also means Yen depreciates)

Step 4 - Comparision

If we closely observe we are making profit in both the cases when yen depreciates OR euro appreciates, therefore we can conclude a a put option on the ¥ with a strike price in €/¥ also a call option on the € with a strike price in ¥/€

jeff jeffy answered 1 year ago
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