You are expecting the euro to go up in value against the dollar, and would like...

You are expecting the euro to go up in value against the dollar, and would like to make a profit based on this view. You are trying to decide between two choices: buying a call option on the euro and selling a put option on the euro. Explain one advantage and one disadvantage of each of these choices.

Expert Solution

Call- is a right but not the obligation to buy a stock, commodity or currency.

Put- is a right but not the obligation to sell a stock, commodity or currency.

Buying a call- Call is bought when investor is bullish towards a particular security or overall market. He has to pay the premium in advance.

Advantage- Buying a call gives unlimited upside potential and loss is limited to the premium paid to buy call option.

Disadvantage- Buyer has to pay higher premium if he is buying In-the-money call option. Buying a call is not good for beginners. Out of the money call options become zero at the time of expiry.

Selling a Put- This is also a bullish strategy. In this strategy, when investor is bullish towards a security, he sells Put option. He receives premium in advance.

Advantage- Investor can retain the premium if security goes up and put gets expired. This strategy is good in Out-of-the money options.

Disadvantage- This strategy involves high risk, profit is limited to the extent of premium received while loss is unlimited.

jeff jeffy answered 1 year ago

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