Question

• Long currency straddle
  • Call option premium = $0.05/€, Put option premium = $0.05/€
  • Strike price = $1.10/€, Option contract size = €62,500
  • Draw graphs of call option, put option, and straddle
  • Mark BE point and Strike prices
  • Mark each premium

Spot exchange rate		$1.00/€	$1.05/€	$1.10/€	$1.15/€	$1.20/€	$1.25/€
Long call option	Exercise (N/Y)
	Holder’s net profit per unit
Long put option	Exercise (N/Y)
	Holder’s net profit per unit
Net profit

Net profit per unit (graph)

• Short currency straddle
  • Call option premium = $0.05/€, Put option premium = $0.05/€
  • Strike price = $1.10/€, Option contract size = €62,500
  • Draw graphs of call option, put option, and straddle
  • Mark BE point and Strike prices
  • Mark each premium

Spot exchange rate		$1.00/€	$1.05/€	$1.10/€	$1.15/€	$1.20/€	$1.25/€
Sell call option	Does holder exercise?
	Holder’s net profit per unit
	Seller’s net profit per unit
Sell put option	Does holder exercise?
	Holder’s net profit per unit
	Seller’s net profit per unit
Net profit

Net profit per unit (graph)

Answer 1

1) Draw Graphs of Call, Put and Straddle Options for Long Positions

Long Call Graph

Long Call 0.15 0.1 0.05 Strike Price = 1.1 Profit 0.95 1.05 1.2 1.25 1.3 Premium = 0.05 Break Even Point = 1.15 (Strike Price + Premium) -0.05 -0.1

Long Put Graph

Long Put 0.15 0.05 Profit Strike Price = 1.1 0.95 1.05 1.1 1.15 1.2 1.25 Premium = 0.05 Break Even Point = 1.05 (Strike Price - Premium) -0.05

Long Straddle Graph

Long Straddle 0.10 0.05 BEP (Downside) BEP (Upside) = 1.2 - 1 Strike Price Profit 0.95 1.05 1.15 1.15 12 1.25 .25 1.3 13 * -0.05 -0.10

2) Mark BE Points and Strike Prices - They have been marked in above graphs

3) Markeach premium - Marked in Call and Put Graphs. For Straddlem Total premium would be 0.05 + 0.05 = 0.1

4) Completed Tabe and Graph of Net Profit per unit would look as follows

Spot Exchange Rate	1.00	1.05	1.10	1.15	1.20	1.25
Long Call Option Exercised?	N	N	N/Y	Y	Y	Y
Holder's Net Profit per unit (A)	-0.05	-0.05	-0.05	0	0.05	0.10
Long Put Option Exercised?	Y	Y	N/Y	N	N	N
Holder's Net Profit per unit (B)	0.05	0	-0.05	-0.05	-0.05	-0.05
Net Profit (A+B)	0	-0.05	-0.10	-0.05	0	0.05

Graph of Net Profit would be same as graph of long straddle in Point No. 1, third graph.

As per guidelines, first 4 sub-parts have been answered