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You are offered a chance to buy a put or call option from a currency dealer with a strike price of USD 0.8300/CHF with June expiration and premium of USD 0.0050/CHF. Your Magic 8 Ball tells you that the spot exchange rate will reach USD 0.8400/CHF sometime between now and June. With your entire savings, or USD 10,000, you want to speculate using the options to make some profits to finance your graduation bash. If you do, i) which option should you buy, ii) what is your notional principal, iii) total net profits, and iv) the rate of return on this speculation, assuming your Magic 8 Ball is right? What is your loss if Magic 8 Ball is wrong? (Hint: Assume the speculation period is one month.)

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M93044826

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