ADMS 1000 Lecture Notes - Lecture 11: Spot Contract, Call Option

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

Document Summary

The seller of the put options could simply refrain from selling the pounds (after being forced to buy them at . 40 per pound) until the spot rate of the pound rises. Also, a speculator might anticipate that a currency will be substantially affected by current economic events yet be uncertain of the effect"s direction. By purchasing both a put option and a call option, the speculator will gain if the currency moves substantially in either direction. Although two options are purchased and only one is exercised, the gains could more than offset the costs. The put options could simply refrain from selling the pounds (after being forced to buy them at . 40 per pound) until the spot rate of the pound rises. However, there is no guarantee that the pound will reverse its direction and begin to appreciate. Unless the pounds are sold immediately, the seller"s net loss would be still greater if the pound"s spot rate continued to fall.