Anil Gupta is working for Maharaja Investment Pty Ltd. in Mumbai, India. He moni

Question

Anil Gupta is working for Maharaja Investment Pty Ltd. in Mumbai, India. He monitors day to day currency movements, particularly on the Australian dollar/Singapore dollar (A$/S$) cross rate. The current spot rate is A$0.8000/S$. After considerable study, he has concluded that the Singapore dollar will appreciate versus the Australian dollar in the coming 90 days, probably to about A$0. 8800/S$. Call and put option premiums on Singapore dollars are A$ 0.00046/S$ and A$ 0.00003/S$. Option strike price is A$ 0.8500/S$. Should Gupta buy a put on Singapore dollars or a call on Singapore dollars? What is Gupta's break-even price on the option purchased in part a)? What is Gupta's gross profit and net profit if the ending 90 day spot rate is A$0.8800/S$? What is Gupta's gross profit and net profit if the ending 90 day spot rate is A$0.9500/S$?

Explanation / Answer

Question a Gupta should buy a put on singapore dollars Question b. Strike price 0.85 Put money 0.0003 Break even cost 0.8503 Question c. Net Profit = 0.88 - 0.8503 = 0.0297 Question d. Net Profit = 0.95 - 0.8503 = 0.0997

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