Cachita believes the U.S dollar will rise significantly against the japanese yen

Question

Cachita believes the U.S dollar will rise significantly against the japanese yen. The current spot rate is 120,00 yen/$. She must choose between the following 90-day options the japanese yen.

A. Should Cachita buy a put on yen or call on yen?

B. What is Cachita's break-even price on the option purchased.

C. What is the gross profit and net profit from the option chosen if the spot rate at the end of the 90 days is 140 yen/$?

Explanation / Answer

= + $.00003/$

= 125.00003yen /$

   = -125 yen/ $

= 20 yen/ $

            Net profit = gross profit – premium paid

                        = 20 yen/ $ -0.00003 yen/ $

                           = 14.99997 yen/ $

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