solution

In March 2020, Bob and Linda are speculators who want to profit from the developing coronavirus pandemic.

• Bob thinks that the CAD/USD rate will go up as the world economy slows down and the demand for Canadian oil goes down.

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• Linda is uncertain about the fate of the CAD/USD exchange but she thinks that is very likely that there will be a large move in this exchange rate.

• Spot rate on March 9th 2020 : 1.3685 CAD/USD.

• Bob and Linda have access to these options to build their speculative strategy:

  • Options on 100 USD, expiration April 17th 2020, strike = 1.36 CAD/USD

  • Call premium = 2.37 CAD

  • Put premium = 1.74 CAD

    • A) What strategy should they use if they each have 10 000 CAD to “invest”?

    • B) What is their accounting profit if the exchange rate at expiration ends up being 1.33 CAD/USD?