CAN YOU PLEASE SHOW ME HOW TO SOLVE THESE QUESTIONS STEP BY STEP PLEASE. Arthur

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CAN YOU PLEASE SHOW ME HOW TO SOLVE THESE QUESTIONS STEP BY STEP PLEASE.

Arthur Doyle at Baker Street. Arthur Doyle is a currency trader for Baker Street, a private investment house in London. Baker Street's clients are a collection of wealthy private investors who, with a minimum stake of £240,000 each, wish to speculate on the movement of currencies. The investors expect annual returns in excess of 25%. Although officed in London, all accounts and expectations are based in U.S. dollars Arthur is convinced that the British pound will slide significantlypossibly to $1.3200/£in the coming 30 to 60 days. The current spot rate is $1.4263/£. Arthur wishes to buy a put on pounds which will yield the 25% return expected by his investors. Which of the following put options would you recommend he purchase? Prove your choice is the preferable combination of strike price, maturity, and up-front premium expense Strike Price $ 1.36IE $1.34 E $ 1.32E $ 1.36 E Maturity 30 days 30 days 30 days 60 days Premium $0.00081 E 0.00021 $ 0.00004 IE $ 0.00333 /E

Explanation / Answer

Answer:

Although maximum return is with 30 days option with strike price of $1.34 but  the expectation of price of $1.32 is from 30 to 60 days, hence he should purchase 60 days put option with strike price of $1.34 to get maximum return of 1225% on 60 days.

Strike Price Value of Put =(Strike price - Expected Price 1.32) Premium Calculation=Premium* (1 + Rate %) Premium* (1 + Rate %) Rate of Return 1.36 0.04 0.00081 =0.00081 *(1+4850%) 0.04 4850% 1.34 0.02 0.00021 =0.00021 * (1+9430%) 0.02 9430% 1.32 0 0.00004 =0.00004 * (1+-100%) 0.00 -100% 1.36 0.04 0.00333 =0.00333 * (1+1101%) 0.04 1101% 1.34 0.02 0.00151 =0.00151* (1+1225%) 0.02 1225% 1.32 0 0.00063 =0.00063 * (1+-100%) 0.00 -100%

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