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 £230,000 ​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 $1.4262/£. 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	$	0.00332	/£
$	1.34	/£	60 days	$	0.00152	/£
$	1.32	/£	60 days	$	0.00061	/£

Answer 1

	Spot Rate	1 GBP =		$ 1.32
	So he will sell his wealth of GBP 230,000
	He will get GBP 230,000 * 1.4262 = $ 328,026				328026
	Now he will buy a put option on bound to sell $1.32 per GBP
	Premium to be paid & Return as per below table
Strike Price ($ per GBP) (A)	Maturity (B)	Premium ('C) ($ per GBP)	No of Contracts to be entered (D)	Premium to be paid (e=C/D) in USD	Premium in GBP (E= e/1.32(spot rate))	Revenue on excercising Put (F=D/A) in GBP	Profit (F-E)	Return
1.36	30 days	0.00081	328026	265.7011	186.3	241195.6	240929.9	58%
1.34	30 days	0.00021	328026	68.88546	48.3	244795.5	244726.6	78%
1.32	30 days	0.00004	328026	13.12104	9.2	248504.5	248491.4	98%
1.36	60 days	0.00332	328026	1089.046	763.6	241195.6	240106.5	27%
1.34	60 days	0.00152	328026	498.5995	349.6	244795.5	244296.9	38%
1.32	60 days	0.00061	328026	200.0959	140.3	248504.5	248304.4	48%
It is better to opt for Strike Price of 1.36 with 60 days as it gives required return at less risk