Currency Strangles (See Append

Currency Strangles (See Appendix B in this chapter.) Assume the following options are currently available for British pounds (£):

■ Call option premium on British pounds = $.04 per unit.

■ Put option premium on British pounds = $.03 per unit.

■ Call option strike price = $1.56.

■ Put option strike price = $1.53.

■ One option contract represents £31,250.

a. Construct a worksheet for a long strangle using these options.

b. Determine the break-even point(s) for a strangle.

c. If the spot price of the pound at option expiration is

$1.55, what is the total profit or loss to the strangle buyer?

d. If the spot price of the pound at option expiration is $1.50, what is the total profit or loss to the strangle writer?

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