1. Currency Straddles Reska, Inc., has constructed a long euro straddle. A call option on euros with an exercise price of $1.10 has a premiumof $.025 per unit. A euro put option has a premium of $.017 per unit. Some possible euro values at option expiration are shown in the following table. (See Appendix B in this chapter.)
VALUE OF EURO AT OPTION EXPIRATION
$.90 $1.05 $1.50 $2.00
Call
Put
Net
a. Complete the worksheet and determine the net profit per unit to Reska, Inc., for each possible future spot rate.
b. Determine the break-even point(s) of the long straddle. What are the break-even points of a short straddle using these options?
2. Uncertainty and Option Premiums This morning, a Canadian dollar call option contract has a $.71 strike price, a premiumof $.02, and expiration date of one month from now. This afternoon, news about international economic conditions increased the level of uncertainty surrounding the Canadian dollar. However, the spot rate of the Canadian dollar was still $.71. Would the premium of the call option contract be higher than, lower than, or equal to $.02 this afternoon? Explain.