A swiss investor invests Amount 5,000,000 Ex rate .7255 US per Sfs Strike Price Call Sfr Put Sfr .72 .0234 .0146 What is the dollar cost premium paid (please show working) A. $161,628 B. $158,086 C. $156,229 D. $157,385
Is this the complete question?
I understand that prices of both the call and the put are in usd, right? If so, + You have 5,000,000 usd + You have 5,000,000 / 0.7255 = 6,891,798 chf You want usd downside = chf upside = call chf = put usd + each call chf = 0.234 usd + total premium = 6,891,798 x 0.234 = 161,268 usd I would go for A
If the USD/CHF decreases your better off, so you would want to buy a call to protect from Upside. For example, if I have $5,000,000 and spot was 0.7 USD/CHF that would be 7,142,857CHF If the Spot increases to .8 USD/CHF that would be 6,250,000 CHF But if it decreased to 0.6 USd/CHF that would be 8,333,333 CHF So as a Swiss investor I benefited if the FX rate decreased, so I want to protect upside not downside…
sorry, of course I prefer usd to go up. I mean, “in case not, I want to buy a derivative that pays me usd downside”