ADMS 1000 Lecture Notes - Lecture 29: Spot Contract, Call Option

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ADMS 1000 Full Course Notes
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ADMS 1000 Full Course Notes
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A speculator who had bought a straddle will therefore exercise the put option but let the call option expire. Thus, the same relationship that applies to individual call and put options also applies to option combinations. Currency strangles are very similar to currency straddles, with one important difference. Speculator who had bought a straddle will therefore exercise the put option but let the call option expire. Therefore, the speculator will buy pounds at the prevailing spot rate and sell them for the exercise price. Given this information, the net profit to the straddle buyer is calculated. The straddle writer will have to purchase pounds for the exercise price. Assuming the speculator immediately sells the acquired pounds at the prevailing spot rate, the net profit to the straddle writer will be. However, there is no guarantee that the pound will appreciate in the near future.

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