Question

noExcel plz.You believe the US dollar will depreciate relative to the peso and appreciate relative to the pound over the next 3 months. You decide to create a portfolio consisting of 4 three-month peso call contracts and 4 three-month pound put contracts to speculate on your belief. The call contracts have 5,000 pesos attached and have a strike price and premium of $.08 and $.03, respectively. The put contracts have 6,000 pounds attached and have a strike price and premium of $1.4 and $.06, respectively.

Find the value of your portfolio (in USD) if the spot rates at expiration are as follows: $.13/peso, $1.37/pound

-80 -1120 1120 320 None of the above

8…..Find the value of your portfolio (in USD) if the spot rates at expiration are as follows: $.07/peso, $1.3/pound. Round intermediate steps to four decimals and your final answer to two decimals.

Answer 1

if the spot rates at expiration are as follows: $.13/peso, $1.37/pound :

Profit on each peso call contract = (spot price at expiration - strike price - premium paid) = ($0.13 - $0.08 - $0.03) = $0.02

profit on 4 peso call contracts = $0.02 * 5,000 * 4 = $400

Profit on each pound put contract = (strike price - spot price at expiration - premium paid) = ($1.4 - $1.37 - $0.06) = -$0.03

profit (loss) on 4 peso call contracts = $0.03 * 6,000 * 4 = $720

value of portfolio = $400 - $720 = -$320.00

The answer is none of the above

if the spot rates at expiration are as follows: $.07/peso, $1.3/pound :

The peso contract expires out-of-money. Hence loss on peso contract = premium paid. Loss on each peso call contract = premium paid = $0.03

loss on 4 peso call contracts = $0.03 * 5,000 * 4 = $600

Profit on each pound put contract = (strike price - spot price at expiration - premium paid) = ($1.4 - $1.30 - $0.06) = $0.04

profit on 4 peso call contracts = $0.04 * 6,000 * 4 = $960

value of portfolio = $960 - $600 = $360.00