Calandra Panagakos at CIBC. Calandra Panagakos works for CIBC Currency Funds in

Question

Calandra Panagakos at CIBC. Calandra Panagakos works for CIBC Currency Funds in Toronto. Calandra is something of a contrarian-as opposed to most of the forecasts, she believes the Canadian dollar (C$) will appreciate versus the U.S. dollar over the coming 90 days. The current spot rate is $0.6749/C$. Calandra may choose between the following options on the Canadian dollar. Should Calandra buy a put on Canadian dollars or a call on Canadian dollars? What is Calandra's breakeven price on the option purchased in part (a)? Using your answer from part (a), what is Calandra's gross profit and net profit (including premium) if the spot rate at the end of 90 days is indeed $0.7604/C$? Using your answer from part (a), what is Calandra's gross profit and net profit (including premium) if the spot rate at the end of 90 days is $0.8253/C$?

Explanation / Answer

Part A:

Since Calandra is expecting Canadian dollar to appreciate, it will expect a fall in US dollar. Therefore she should buy a put option on Canadian dollars.

Part B:

Break-even price = strike price – premium

                                = 0.7003 – 0.00002

                                   = 0.70028

Part C:

Since the US dollar is appreciating and Canadian dollar is depreciation, Calandra will no exercise the option, so gross profit would be zero and net loss would be 0.00002.

Part D:

Since the US dollar is appreciating and Canadian dollar is depreciation, Calandra will no exercise the option, so gross profit would be zero and net loss would be 0.00002.

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