Question

The current spot exchange rate Singapore dollar against U.S. dollar (SGD/USD) is 0.6000. After considerable study, an investor concluded that the Singapore dollar will appreciate against the U.S. dollar in the coming 90 days, probably to about 0.7000. She has the following options on the Singapore dollar to choose from:
Option Strike price Premium
Put on SGD 0.6500 0.00003
Call on SGD 0.65 0.00046
1. Should the investor buy a put on Singapore dollars or a call on Singapore dollars?
2. What is the investor's break-even price on the option purchased in part a?
3. Using your answer from part a, what is the investor's gross profit and net profit (including premium) if the spot rate at the end of 90 days is indeed 0.7000?
4.Using your answer from part a, what is the investor's gross profit and net profit (including premium) if the spot rate at the end of 90 days is 0.8000?

Answer 1

Answer:

i) Investor should buy a call option as expected spot price on SGD after 90 days is 0.7 which less than the strike price 0.65 under call option.

II) Break-even price on option selected

Strike price under call option   0.65000

Add : Premium                            0.00046

Break even price                       0.65046

iii)  Actual spot rate after 90 days            0.70000

Less: Strike price under call option        0.65000

Gross profit                                               0.05000

Less: Call option premium                       0.00046

Net profit                                                  0.04954

iv)  Actual spot rate after 90 days          0.80000

Less: Strike price under call option       0.65000

Gross profit                                             0.15000

Less: Call option premium                      0.00046

Net Profit                                                 0.14954