Question

• Long cury strangle Call option premium - 50.03., Put option premium - $0.02 € Call option strike price 1.25/6, Put option strike price $1.15 € Option contract size - €62,500 Draw graphs of call option, put option, and straddle Mark BE point and Strike prices Mark each premium 1 S105 S 15E $1.20 € $1.25 € $1.30/E Long call option Spot exchange rate Exercise (NY) Holder's net profit per unit Exercise (NY Holder's net profit per unit Net profit Long put option Net profit per unit

Answer 1

Long currency strangle involves taking a long position in a call option of a higher strike, and a long position in a put option of a lower strike.

Payoff of a long call option = Max[S-X, 0] - P

Payoff of a long put option = Max[X-S, 0] - P

S = underlying price at expiry,

X = strike price

P = premium paid or received (long options involve paying premium, and short options receive premium)

A long call will be exercised if the spot price is higher than the strike price

A long put will be exercised if the spot price is lower than the strike price

I c D E F 1 Spot Long Call Long Put exchange net profit Long Call net profit Long Put Net 1 rate ($1.25) Exercise ($1.15) Exercise Profit $1.05 $ (1,875) N $ 5,000 Y $ 3,125 $1.10 $ (1,875) N $ 1,875 Y $ (0) $1.15 $ (1,875) N $ (1,250) N $ (3,125) $1.20 $ (1,875) N $ (1,250) N $ (3,125) $1.25 $ (1,875) N $ (1,250) N $ (3,125) $1.30 $ 1,250 Y $ (1,250) N $ 0

А Spot exchange 1 rate 2 1.05 3 1.1 4 1.15 5 1.2 6 1.25 7 1.3 Long Call Long Call net profit ($1.25) Exercise =(MAX(A2-1.25,0)-0.03)*62500 N =(MAX(A3-1.25,0)-0.03) * 62500 N =(MAX(A4-1.25,0) -0.03) *62500 N =(MAX(A5-1.25,0)-0.03)*62500 N =(MAX(A6-1.25,0)-0.03) *62500 N =(MAX(A7-1.25,0)-0.03)*62500 Y Long Put Long Put net profit ($1.15) Exercise =(MAX(1.15-A2,0)-0.02)*62500 Y =(MAX(1.15-A3,0)-0.02)*62500 Y =(MAX(1.15-A4,0)-0.02)*62500 N =(MAX(1.15-A5,0)-0.02)*62500 N =(MAX(1.15-A6,0)-0.02)*62500 N =(MAX(1.15-A7,0)-0.02) *62500 N Net Profit =SUM(B2:D2) =SUM(B3:03) =SUM(B4:04) =SUM(B5:05) =SUM(B6:06) =SUM(B7:07)