When would a currency speculator buy a put option that gives the owner the right to sell the foreign currency at the specified (exercise) price in the future. When would it be worth exercising the option? What are some advantages and disadvantages of currency options compared to forward exchange contracts?
What will be an ideal response?
POSSIBLE RESPONSE: A speculator would buy a put option when he or she expects that the spot value of a currency will be lower in the future, with the intention of buying low and selling high. If the spot value of the currency is less than the exercise price, then it would be worth buying the currency spot and selling it in the option at the exercise price. One advantage of a currency option is that the size of the loss cannot exceed the option premium paid to buy the option. The major disadvantage is that the investor has to pay the premium to purchase the option.
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A) 1. B) 1.5. C) 2. D) 2.5.
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