Question

Suppose that you are a speculator and that you noticed that the Japanese yen (¥) has depreciated substantially against the U.S. dollar (USD) over the past several months. The current spot rate $0.009546 (i.e. 0.009546 USD per ¥). Several major financial press articles suggest that the yen will continue to substantially depreciate over the next month. However, you expect the yen to substantially appreciate over the next month. Note that you do not currently have a position in yen; however, if you decide to purchase yen as part of an option strategy, please assume that you will purchase yen at the current spot rate of $0.009546.

Your speculative choices are:

• Long Call
• Short Put
• Protective Put
• Covered Call
• Long Straddle
• Short Straddle

The following options are available for purchase/sale:

• June 2020 Call: X = $0.00945; C = $0.000271
• June 2020 Put: X = $0.00945; P = $0.000172

Given your expectations, which strategy would you choose and why (choose the best answer – select the strategy that best aligns with your expectations for the yen)? On the following page, graph the profit diagram (where profit is expressed as USD per ¥) for your position, making sure to provide a title for the graph and clearly label each axis. Please label the corner/kink and break-even value(s) in addition to the minimum/maximum profit (expressed as USD per ¥) for the strategy. Lastly, calculate your profit (expressed as USD per ¥) if the spot rate of the yen at expiration ends up being $0.0093? Ignore trading costs. Writing out the profit function(s) will make everything much easier. SHOW ALL WORK.

Answer 1

Since the yen is depriciating as compare to $ so it's better to have a put option in Yen. The trend analyst expect that the Yen will depriciate more and but speculator is having the impression that the yen will be become stronger and will not depriciate so to cover the risk he should fo with the long starddle strategy in wich speculator will end up buying both call and put option at same price.