You have $120,000 that you want to use to speculate in yen options. The spot rat

Question

You have $120,000 that you want to use to speculate in yen options. The spot rate is ¥112.67/$. You think that, at this rate, the yen is over-priced and, therefore, you expect it to substantially depreciate against the dollar in the coming few weeks. You decide to use your $120,000 to act on your expectations. The yen three-week calls and puts with an exercise price of $0.008000/¥ are selling for (i.e. premiums are) $0.000300/¥ and $0.000500/yen respectively. (Each yen contract is for 6.25 million yen)

1.) Would you buy call or put contracts? Explain

2.) How many contracts can you buy with the money you have?

3.) Assume that you buy put contracts. If at the end of three weeks the spot rate is ¥116.40/$, calculate your total payoffs and profit/loss from your investment.

Explanation / Answer

Hello Sir/ Mam

Spot Rate now = Yen112.67/$

1.) As i think that at this price, yen is overpriced, I'll be bearish on Yen and bullish on dollar.

Now, yen three-week excercise price = $0.008/Yen

As we expect dollar to appreciate against Yen, I'll buy call options.

2.) Premium to be paid per call = $0.0003/Yen in contract of 6.25million Yen.

Hence, premium per contract = $1,875.

Total buying amount = $120,000

Hence, Number of Call contracts = $120000/$1875 = 64 contracts

3.) If I buy put options, spot rate after 3 weeks = $0.0085911/Yen

Excercise Price = $0.008/Yen

As spot rate at expiry is more than excercise price, put options are out of the money options ang hence, will lapse and Total Payoffs = $0 and Profit/ (Loss) = (100%) or ($120,000).

I hope this solves your doubt.

Feel free to comment if you still have any query.

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