Arthur Doyle at Baker Street. Arthur Doyle is a currency trader for Baker Street
ID: 2820846 • Letter: A
Question
Arthur Doyle at Baker Street. Arthur Doyle is a currency trader for Baker Street, a private investment house in London. Baker Street's clients are a collection of wealthy private investors who, with a minimum stake of £220,000 each, wish to speculate on the movement of currencies. The investors expect annual returns in excess of 25 %. Although officed in London, all accounts and expectations are based in U.S. dollars. Arthur is convinced that the British pound will slide significantly—possibly
to $1.3200/£—in the coming 30 to 60 days. The current spot rate is$1.4265/£.
Arthur wishes to buy a put on pounds which will yield the 25 % return expected by his investors. Which of the following put options would you recommend he purchase? Prove your choice is the preferable combination of strike price, maturity, and up-front premium expense.
Because his expectation is for "30 to 60 days" he should confine his choices to the
? day options to be sure and capture the timing of the exchange rate change.
The return on investment (ROI) at the strike price of $1.36 /pound£ is ?%.
(Round to the nearest integer.)
The return on investment (ROI) at the strike price of $1.34 /pound£ is ? %.
(Round to the nearest integer.)
The return on investment (ROI) at the strike price of $1.32 /pound£ is ? (Round to the nearest integer.)
Arthur should purchase the 60-day option at strike price
$?/pound£.
Strike Price
Maturity
Premium
$
1.36
/£
30 days
$
0.00081
/£
$
1.34
/£
30 days
$
0.00021
/£
$
1.32
/£
30 days
$
0.00004
/£
$
1.36
/£
60 days
$
0.00333
/£
$
1.34
/£
60 days
$
0.00151
/£
$
1.32
/£
60 days
$
0.00061
/£
Strike Price
Maturity
Premium
$
1.36
/£
30 days
$
0.00081
/£
$
1.34
/£
30 days
$
0.00021
/£
$
1.32
/£
30 days
$
0.00004
/£
$
1.36
/£
60 days
$
0.00333
/£
$
1.34
/£
60 days
$
0.00151
/£
$
1.32
/£
60 days
$
0.00061
/£
Explanation / Answer
As Arthur is convinced the change in currency price to $1.3200/£—in the coming 30 to 60 days. So position to created in 60 days PUT option , so he can exercise the option on and before 60 days.
Return from PUT option = Spot - Strike - premium paid
Return % = Return from PUT / Spot price *100
The return on investment (ROI) at the strike price of $1.36 /pound£ = (1.4265-1.36-0.00333)/1.4265 = 4.43 %
Annualized return = return for 60 days * 6 = 26.58% = 27%
The return on investment (ROI) at the strike price of $1.34 /pound£ =(1.4265- 1.34-0.00151)/1.4265 =5.95%.
Annualized return = return for 60 days * 6 = 35.7% = 36%
The return on investment (ROI) at the strike price of $1.32 /pound£ =(1.4265 -1.32-0.00061)/1.4265 = 7.43%
Annualized return = return for 60 days * 6 = 44.58% = 45%
Arthur should purchase the 60-day option at strike price $1.32/pound£
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