Suppose that you are a speculator and that you noticed that the Japanese yen (F has...

Suppose that you are a speculator and that you noticed that the Japanese yen (F has depreciated substantially against the U.S. dollar (USD) over the several months. The current spot rate S0.0090 (i.e. 0.0090 USD per Y). Several major financial press articles suggest that the yen will continue to substantially depreciate over the next several months. However, you expect the value of the yen to remain very stable over the next several months (i.e., you expect very little to no volatility). Note that you do not currently have a position in yen; however, if you decide to purchase yen as part of an option strategy, please assume that you will purchase yen at the current spot rate of $0.0090 Your speculative choices are: .Long Call . Short Put Protective Put Covered Call Long Straddle Short Straddle The following options are available for purchase/sale: June 2019 Call: X - S0.0090; C- $0.000206 June 2019 Put: X S0.0090; P $0.000160 June 2019 Put: X = $0.0090; P = $0.000 160 · Given your expectations, which strategy would you choose and why (choose the best answer select the strategy that best aligns with your expectations for the yen)? On the following page, graph the profit diagram (where profit is expressed as USD per¥) for your position, making sure to provide an appropriate title for the graph and label each axis. Please label the corner/kink and break-even value(s) in addition to the minimum/maximum profit (expressed as USD per I) for the strategy. Lastly, calculate your profit (expressed as USD per Y) if the spot rate of the yen at expiration ends up being S0.0093? Ignore trading costs. Writing out the profit function(s) will make everything much easier.

Solutions

Expert Solution

If we expect that the market will not be much volatile i.e. the prices would remain stable around the current price however the market is expecting that the price of yen fill fall then the best strategy in this regard is covered call i.e. buy underlying i.e. Yen at spot and sell call at strike price of k=.0090 for a premium of .000206 as we expect that prices won't move so we won't have any pay off from call while we have earned the premium and we won't sell the asset untill prices go up by significant amount now apart from this there can be only two situations prices may fall or rise significantly so if they fall we won't sell the underlying untill they rise call pay off would be zero and if they rise significantly then we would have to pay to the option buyer but this loss can be recovered by selling the underlying asset i.e. yen now let ua see how this works with the help of data and graph. But let us first derive our profit equation if the future asset price is S then profit from asset = S -.0090 and profit from call =premium-callpayoff = .000206 -max(0,(S-.0090))

Total profit = S -.0090 +.000206 - max(0,(S-.0090))

= S -.008794 - max(0,(S-.0090))

jeff jeffy answered 1 year ago

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