Given the Following Information If Your Expectations Prove Correct at Maturity:
A)What Would Be

question 7

Essay

Given the following information:
$\begin{array}{ll}\text { Spot rate today: } & \$ 1.00 \text { euro } \\\text { Your expectation of the spot rate in four months: } & \$ 0.93 / \text { euro } \\\text { four month European call option: } & \\\quad \text { strike price } & \$ 0.99 \text { euro } \\\text { premium }& \$ 0.02 / \text { euro }\\\text { four month European put option: } \\\text { strike price } & \$ 0.99 \text { /euro }\\\text { premium } & \$ 0.03 / \text { euro } \\\end{array}$ If your expectations prove correct at maturity:
a)What would be your profit per euro from speculating in the options market? Show the strategy that would give the highest payoff given your expectation about the future exchange rate.
b)Graphically illustrate the loss and profit positions for the speculation in the options market.Label your graph clearly.

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Definitions:

Lethargic

A state of fatigue, sluggishness, or a lack of energy, which can be a symptom of various medical conditions or the result of physical overexertion.

Pedal Pulses

Pulses that can be felt over the arteries of the feet, used to assess circulatory health in the lower extremities.

Amplitude

A measurement of the magnitude of change in a fluctuating variable, often used in physics to describe the height of a wave from its midpoint.

Diminished

Reduced in size, importance, or intensity.