Question

Arthur Doyle is a currency trader for Baker​ Street, a private investment house in London. Baker​ Street's clients are a collection of wealthy private investors​ who, with a minimum stake of £220,000 ​each, wish to speculate on the movement of currencies. The investors expect annual returns in excess of 25​%. Although officed in​ London, all accounts and expectations are based in U.S. dollars. Arthur is convinced that the British pound will slide significantly—possibly to $1.3200/£—in the coming 30 to 60 days. The current spot rate is $ 1.4261/£. Arthur wishes to buy a put on pounds which will yield the 25​% return expected by his investors. Which of the following put options would you recommend he​ purchase? Prove your choice is the preferable combination of strike​ price, maturity, and​ up-front premium expense.

Strike Price			Maturity	Premium
	$1.36/£		30 days		$0.00081/£
	$1.34/£		30 days		$0.00021/£
	$1.32/£		30 days		$0.00004/£
	$1.36/£		60 days		$0.00333/£
	$1.34/£		60 days		$0.00151/£
	$1.32/£		60 days		$0.00062/£

Answer 1

	Payoff on Put Option:
	Strike Price =X, Price at expiration=$1.3200/Pound
	If X< or =$1.3200/Pound, Payoff =NIL
	If X>$1.3200/Pound, Payoff =$(X-1.3200)
		A	B	C	D	E=D-C	F=E/C	G=F*(360/B)
		Strike Price	Maturity(Days)	Premium/Pound	payoff	Profit	Return	Annual Return	% Return
		$1.36/£	30	$0.00081	$0.04	$0.03919	48.38	580.59	58059%
		$1.34/£	30	$0.00021	$0.02	$0.01979	94.24	1,130.86	113086%
		$1.32/£	30	$0.000040	$0	-$0.00004	(1.00)	(12.00)	-1200%
		$1.36/£	60	$0.00333	$0.04	$0.03667	11.01	66.07	6607%
		$1.34/£	60	$0.00151	$0.02	$0.01849	12.25	73.47	7347%
		$1.32/£	60	$0.00062	$0	-$0.00062	(1.00)	(6.00)	-600%
	RECOMMENDATION:
	Strike Price of $1.32 will give negative Return
	Hence, Put options withStrike Price $1.32 Not Recommended
	Among the remaing choices:
	Strike Price of $1.34 with 30 days gives max. Return	113086%
	Strike Price of $1.34 with 30 days Recommended