INTERNATIONAL FINANCE MANAGEMENT CASE

STUDY-5
The Options Speculator

DONE BY
SACHIN D
PES1PG20MB272
 The Options Speculator

A speculator is considering the purchase of five three-month Japanese yen call options with a striking
price of 96 cents per 100 yen. The premium is 1.35 cents per 100 yen.
The spot price is 95.28 cents per 100 yen and the 90-day forward rate is 95.71 cents.
The speculator believes the yen will appreciate to $1.00 per 100 yen over the next three months. As the
speculator’s assistant, you have been asked to prepare the following:
1. Graph the call option cash flow schedule.
2. Determine the speculator’s profit if the yen appreciates to $1.00/100 yen.
3. Determine the speculator’s profit if the yen appreciates only to the forward rate.
4. Determine the future spot price at which the speculator will only break even.

SOLUTION
1. Graph the call option cash flow schedule.
Strike price: 96 cents per 100 yen
Premium: 1.35 cents per 100 yen
Spot price: 95.28 cents per 100 yen

Spot price Premium Sell Buy Net payoff

(profit or loss)
92 1.35 92 92 -1.35
93 1.35 93 93 -1.35
94 1.35 94 94 -1.35
95 1.35 95 95 -1.35
96 1.35 96 96 -1.35
97 1.35 97 96 -0.35
98 1.35 98 96 0.65
99 1.35 99 96 1.65
100 1.35 100 96 2.65
101 1.35 101 96 3.65

Graph:-
2. Determine the speculator’s profit if the yen appreciates to $1.00/100 yen.
Speculator’s profit when yen appreciates to $1.00/100 yen
Profit= (Number of contracts*1,000,000) *[(spot price-strike price)-Premium]10000
= (5*1,000,000) *[(100-96)-1.35]10000 =$1,325

3. Determine the speculator’s profit if the yen appreciates only to the forward rate.
As forward price is less then strike price option will not be executed and the loss will be only the
premium amount paid:

1.35*5=6.76 cents

3. Determine the future spot price at which the speculator will only break even.
Break even price for call option is equal

strike price + premium: 96+1.35 =97.35 cents