Yize Chen trades currencies for Sumatra Funds in Jakarta. She focuses nearly all of her time and attention on the U.S. dollar (USD) to Singapore dollar (SGD) cross-rate. The current spot rate is USD 0.6000 = SGD 1.00. After considerable study, she has concluded that the Singapore dollar will appreciate versus the U.S. dollar in the coming 90 days, probably to about USD 0.7000 = SGD 1.00. She has the following options on the Singapore dollar to choose from: Should Yize buy a put on Singapore dollars or a call on Singapore dollars? What is Yize’s break-even price on the option purchased in part (a)? Using your answer from part (a), what are Yize’s gross profit and net profit (including premium) if the spot rate at the end of 90 days is indeed USD0.7000? Using your answer from part (a), what are Yize’s gross profit and net profit (including premium) if the spot rate at the end of 90 days is USD0.8000
Yize Chen trades currencies for Sumatra Funds in Jakarta. She focuses nearly all of her time and attention on the U.S. dollar (USD) to Singapore dollar (SGD) cross-rate. The current spot rate is USD 0.6000 = SGD 1.00. After considerable study, she has concluded that the Singapore dollar will appreciate versus the U.S. dollar in the coming 90 days, probably to about USD 0.7000 = SGD 1.00. She has the following options on the Singapore dollar to choose from: Should Yize buy a put on Singapore dollars or a call on Singapore dollars? What is Yize’s break-even price on the option purchased in part (a)? Using your answer from part (a), what are Yize’s gross profit and net profit (including premium) if the spot rate at the end of 90 days is indeed USD0.7000? Using your answer from part (a), what are Yize’s gross profit and net profit (including premium) if the spot rate at the end of 90 days is USD0.8000
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Yize Shen at Sumatra Funds. Yize Chen trades currencies for Sumatra Funds in Jakarta. She focuses nearly all of her time and attention on the U.S. dollar (USD) to Singapore dollar (SGD) cross-rate. The current spot rate is USD 0.6000 = SGD 1.00. After considerable study, she has concluded that the Singapore dollar will appreciate versus the U.S. dollar in the coming 90 days, probably to about USD 0.7000 = SGD 1.00. She has the following options on the Singapore dollar to choose from:
- Should Yize buy a put on Singapore dollars or a call on Singapore dollars?
- What is Yize’s break-even price on the option purchased in part (a)?
- Using your answer from part (a), what are Yize’s gross profit and net profit (including premium) if the spot rate at the end of 90 days is indeed USD0.7000?
- Using your answer from part (a), what are Yize’s gross profit and net profit (including premium) if the spot rate at the end of 90 days is USD0.8000?
Transcribed Image Text:**Option Pricing Table**
| **Option** | **Strike Price** | **Premium** |
|----------------|---------------------|------------------------|
| Put on SGD | USD 0.6500 = SGD 1.00 | USD 0.00003 per SGD |
| Call on SGD | USD 0.6500 = SGD 1.00 | USD 0.00046 per SGD |
**Explanation:**
This table presents data on currency options involving Singapore Dollar (SGD) with respect to the U.S. Dollar (USD).
- **Put on SGD:** This option gives the holder the right, but not the obligation, to sell SGD at the strike price of USD 0.6500 per SGD. The premium for this option is USD 0.00003 per SGD.
- **Call on SGD:** This option allows the holder to buy SGD at the strike price of USD 0.6500 per SGD. The premium required for this option is USD 0.00046 per SGD.
The "strike price" is the rate at which the option can be exercised, and the "premium" is the cost required to purchase the option per unit of SGD.
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