Call Option Analysis: Profit, Loss, and Break-Even for Speculators

This finance assignment delves into the analysis of call options, focusing on the profitability and break-even points for option speculators. The assignment begins by graphing the call option cash flow schedule, providing a visual representation of potential outcomes. It then calculates the speculator's profit if the Yen appreciates to $1.00/100 yen, demonstrating the impact of favorable market movements. Furthermore, the analysis explores the scenario where the Yen appreciates only to the forward rate, revealing potential losses due to the premium paid. Finally, the assignment determines the future spot price at which speculators will break even, identifying the critical price level for profitability. The conclusion summarizes the findings, highlighting the relationship between price fluctuations and the speculator's profit or loss. The assignment includes references to relevant financial literature.

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Abstract:.....................................................................................................................................2
1. Graphing the call option cash flow schedule:........................................................................2
2. Detecting the speculator profit if Yen appreciate to $1.00/100 yen:.....................................2
3. Detecting the speculator profit if Yen appreciate only to the forward rate:...........................3
4. Determining the future spot price at which the speculators will breakeven:.........................3
Conclusion:................................................................................................................................4
Reference and Bibliography:......................................................................................................5

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E = 96
0
C = -1.35 ST
ST = E + C
Abstract:
The overall assignment mainly depicts the call option of options speculator, where the
adequate profitability could be identified in different situations. The relevant cash flow
schedule, speculators profit and break even are mainly identified from the following
calculations.
1. Graphing the call option cash flow schedule:
2. Detecting the speculator profit if Yen appreciate to $1.00/100 yen:
Particulars Value
Contract 5
Value of Contract 6,250,000
Price 100
Striking price 96

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premium 1.35
Profit 8281.25
The overall above table indicates that relevant profit of 8281.25 will be incurred if the
overall value increases to 100 cents.
3. Detecting the speculator profit if Yen appreciate only to the forward rate:
Particulars Value
Contract 5
Value of Contract 6,250,000
Striking price 96
Price 95.71
premium 1.35
Loss with premium -5125
Actual loss -4218.75
From the overall evaluation of above table the decline in value will result in loss,
where total loss will only be the premium that is paid by the individual as no exercising of the
trade will be conducted (Henry, 2013). However, the actual loss that will be conducted by the
investors amounts to -4218.75, which only consist of the premiums on the trade.
4. Determining the future spot price at which the speculators will breakeven:
Particulars Value
E 96
C 1.35

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ST E + C
ST 96 + 1.35
ST 97.35
The future spot price that will be obtained by the speculator maintaining breakeven
valuation is 97.35 cents.
Conclusion:
After the overall evaluation of the financial options of option speculators it could be
identified that any decline in price might directly result in loss, whereas the overall increment
would generate higher profits. However, until the price of 97.35 cents the option speculator is
mainly at breakeven, where no profit no loss will be conducted from the trade. Nevertheless
after the increment of price from 97.35 cents the overall profit could be witnessed by the
Option Speculator.

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Reference and Bibliography:
Bodie, Z. (2013). Investments. McGraw-Hill.
Henry, S. C. (2013). Using Option-Implied Volatility to Predict Earnings Surprises in the
Stocks of the Dow Jones Industrial Average. ISSN 2168-0612 FLASH DRIVE ISSN
1941-9589 ONLINE, 390.
Martins, J., Marques, R. C., Cruz, C. O., & Fonseca, Á. (2017). Flexibility in planning and
development of a container terminal: an application of an American-style call
option. Transportation Planning and Technology, 40(7), 828-840.
Tong, T. W., & Li, S. (2013). The assignment of call option rights between partners in
international joint ventures. Strategic Management Journal, 34(10), 1232-1243.
Yamashita, M. (2014). Optimal Investment Strategy for Kinked Utility Maximization:
Covered Call Option Strategy. Journal of Mathematical Finance, 4(02), 55.
Zhang, H., Liu, F., Turner, I., Chen, S., & Yang, Q. (2017). Numerical simulation of a Finite
Moment Log Stable model for a European call option. Numerical Algorithms, 75(3),
569-585.