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

question 22

Essay

Given the following information:
$\begin{array}{ll}\text { Spot rate today: } & \$ 1.50/ \text { SF } \\\text { Your expectation of the spot rate in three months: } & \$1.55 / \text { SF } \\\text { four month European call option: } & \\\quad \text { strike price } & \$ 1.51/ \text { SF } \\\text { premium }& \$ 0.02 / \text { SF }\\\text { four month European put option: } \\\text { strike price } & \$1.51/ \text { SF }\\\text { premium } & \$ 0.03 / \text { SF } \\\end{array}$ If your expectations prove correct at maturity:
a)What would be your profit per Swiss franc 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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