Currency strangles. (See Appendix 5B in this chapter.) Assume the following options are currently available for dollars:
l Call option premium on dollars ¼ £0.04 per unit. l Put option premium on dollars ¼ £0.03 per unit. l Call option strike price ¼ £0.64.
l Put option strike price ¼ £0.62.
l One option contract represents $50 000
a. Construct a diagram for a long strangle using these options.
b. Determine the breakeven point(s) for a strangle.
c. If the spot price of the dollar at option expiration is £0.63, what is the total profit or loss to the strangle buyer?
d. If the spot price of the dollar at option expiration is £0.51, what is the total profit or loss to the strangle writer?