1.If you expect the British pound to depreciate, you could speculate by ____ pou
ID: 2741680 • Letter: 1
Question
1.If you expect the British pound to depreciate, you could speculate by ____ pound call options or ____ pound put options.
A. selling; purchasing
B. selling; selling
C. purchasing; purchasing
D. purchasing; selling
2.The premium on a pound put option is $.04 per unit. The exercise price is $1.50. The break-even point is ____ for the buyer of the put (Assume zero transactions costs and that the buyer and seller of the put option are speculators.)
A.$1.46
B.$1.54
C.$1.50
D.$1.62
A. selling; purchasing
B. selling; selling
C. purchasing; purchasing
D. purchasing; selling
Explanation / Answer
1) You could speculate by selling pound call option or purchasing pound put option. This is because, in depreciating currency by selling a call, you earn the premium and call option would expire worthless. Similarly, on buying a put option , you are locking in a higher selling price , therby locking a gain
2) Breakeven price of put option = Exercise price - Premium = 1.50 - 0.04 = 1.46
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