Assume that a speculator received news that makes her believe that the yen will appreciate or depreciate substantially in the near future, but she is not certain of the direction. Also assume that the exercise prices of call and put options are the same. The most appropriate method for speculation is a ____and it may be achieved by ____.

Question

Quizplus · Accepted Answer

A straddle involves purchasing both a call option and a put option with the same exercise price and expiration date. This allows the speculator to profit regardless of which way the currency moves. If the yen appreciates, the call option will be exercised and the speculator makes a profit. If the yen depreciates, the put option will be exercised and the speculator makes a profit. Therefore, choice A is the best choice in this scenario.

Assume That a Speculator Received News That Makes Her Believe