university of Georgia, finance 4810
The Option Speculator Mini-Case is designed to test your knowledge of speculation with currency options.
A speculator is considering the purchase of five three-month Japanese yen call options with a strike price of 96 cents per 100 yen. The premium is 1.35 cents per 100 yen. The spot price is 95.28 cents per 100 yen and the 90-day forward rate is 95.71 cents. The speculator believes the yen will appreciate to $1.00 per 100 yen over the next three months. As the speculator’s assistant, you have been asked to prepare the following:
- In Excel , diagram the call option, profit (or loss) on the y-axis and future spot price on the x-axis.
- Determine the speculator’s profit if the yen appreciates to $1.00/100 yen.
- Determine the speculator’s profit if the yen appreciates only to the forward rate.
- Determine the future spot price at which the speculator will only break even.
Hint: To correctly graph all points on the payoff line, for the chart type in Excel you will need to use an X Y (Scatter) with Straight Lines and Markers.
Keep in mind that for your assignment, you should enter data for Profit and Future Spot Rate as the Y-axis and X-axis variables. To create the data, you will select the Future Spot Rates notes in the questions and you can also add additional Future Spot Rates at regular intervals, and then enter the corresponding Profit in the same row. Also, you need to make sure to include the strike price as one of the future spot rates. On a given row Profit corresponds to the Future Spot Rate.