ADMS 1000 Lecture Notes - Lecture 28: Straddle, Put Option, Call Option

• School: York University
• Department: Administrative Studies
• Course: ADMS 1000
• Professor: Alan Shapiro

Document Summary

Individuals can speculate using currency straddles based on their expectations of the future movement in a particular foreign currency. However, this is a rather risky position if the currency appreciates or depreciates substantially, the straddle writer will lose money. Call and put option contracts on british pounds ( ) are available with the information. Call option premium on british pounds $. 035. Put option premium on british pounds $. 025. At expiration, the spot rate of the pound is . 40. Speculate using currency straddles based on their expectations of the future movement in a particular foreign currency. For example, speculators who expect that the british pound will appreciate or depreciate substantially can buy a straddle. If the pound appreciates substantially, the speculator will let the put option expire and exercise the call option. If the pound depreciates substantially, the speculator will let the call option expire and exercise the put option. Speculators may also profit from short straddles.