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Category > Management Posted 06 Jan 2018 My Price 9.00

derivatives dealer

In March, a derivatives dealer offers you the following quotes for June British pound option 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

0.026

Call

1.44

0.0417

0.0422

Put

  

0.0422

0.0427

Call

1.48

0.0255

0.026

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 a 1.44 call

(2) Short a 1.48 call

(3) Long a 1.40 put

(4) Short a 1.44 put

June
USD/GBP

Net Initial
Cost

Call 1.44
Profit

Call 1.48
Profit

Put 1.40
Profit

Put 1.44
Profit

Net Profit

1.36

—

—

—

—

—

—

1.4

—

—

—

—

—

—

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 between a long 1.44 call and a short 1.44 put position. (Hint: Consider what sort of forward 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 10:01 PM My Price 9.00

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