Question : One of the non-EUR currency exposures in the Portfolio is GBP. Aron frequently adjusts his GBP positions based on his short-term tactical outlook. Aron forecasts that the GBP will appreciate by 5% against the USD over the next six months. The current USD/GBP rate is 1.60 (1 GBP = 1.60 USD). Aron is considering the following six-month European option positions with the primary objective of increasing his GBP exposure in line with his forecast, and a secondary objective of minimizing the initial cash outlay:
Trade 1: Buy call with 1.68 strike Sell call with 1.72 strike
Trade 2 : Buy call with 1.60 strike Sell call with 1.68 strike
Trade 3 : Buy call with 1.60 strike Sell call with 1.72 strike
C. Determine the trade that will most likely satisfy Aron’s objectives at expiration. Justify your response.
Answer is Trade 2. I had chosen Trade 3. Wouldn’t the stock be called away since it is written at the forecasted price of 1.68, once it reaches that price?