David Agbo is considering buying ten call options on Swiss franc on the Philadelphia Stock Exchange at a strike price of 54 cents per pound. The contract size is SF62, 500. The option will expire in three months. The premium is 2.0 cents per pound. Ignore
the brokerage cost. The spot rate is currently $.5400/SF and the three-month forward rate is $.5525/SF. David Agbo believes that the most likely range for the spot pound in three months will be a low of $.5000/SF to a high of $.6200/SF, but the most likely value
will be $.5900/SF.
(a) Diagram the
(b) Calculate what he would gain or lose at his expected range of future spot prices and at his expected future spot price.
(c) Calculate and show on the diagram the breakeven future spot price.
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