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    Argosy University/ Phoniex University/
    Nov-2005 - Oct-2011

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    Phoniex University
    Oct-2001 - Nov-2016

Category > Management Posted 06 Jan 2018 My Price 8.00

op- tion contracts

9.      In March, a derivatives dealer offers you the following quotes for June British pound op- tion contracts (expressed in U.S. dollars per  GBP):

MARKET  PRICE  OF CONTRACT

Contract

Strike Price

Bid

Offer

Call

USD 1.40

0.0642

0.0647

Put

 

0.0255

0.0260

Call

USD 1.44

0.0417

0.0422

Put

 

0.0422

0.0427

Call

USD 1.48

0.0255

0.0260

Put

 

0.0642

0.0647

a.    Assuming each of these contracts specifies the delivery of GBP 31,250 and expires in exactly three months, complete a table similar to the following (expressed in dollars) for a portfolio consisting of the following  positions:

(1)  Long one 1.44  call

(2)  Short one 1.48 call

(3)  Long one 1.40 put

(4)  Short one 1.44 put

 

Net

June

USD/GBP

Initial

Cost

Call 1.44

Profit

Call 1.48

Profit

Put  1 .40

Profit

Put  1 .44

Profit

Net

Profit

1.36

—

—

—

—

—

—

1.40

—

—

—

—

—

—

1.44

—

—

—

—

—

—

1.48

—

—

—

—

—

—

1.52

—

—

—

—

—

—

b.    Graph the total net profit (i.e., cumulative profit less net initial cost, ignoring time  value considerations) relationship using the June  USD/GBP  rate on the horizontal  axis (be sure to label the breakeven point(s)). Also, comment briefly on the nature of the currency speculation represented by this   portfolio.

c.    If in exactly one month (i.e., in April) the spot USD/GBP rate falls to 1.385 and the effective annual risk-free rates in the United States and England are 5 percent and 7 percent, respectively, calculate the equilibrium price differential that should exist be- tween a long 1.44 call and a short 1.44 put position. (Hint: Consider what sort of for- ward contract this option combination is equivalent to and treat the British interest   rate as a dividend yield.)

 

 

Answers

Maurice Tutor
(5)
Status NEW Posted 06 Jan 2018 09:01 PM My Price 8.00

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