Dash Brevenshure works for the currency trading unit of ING Bank in London. He speculates that in the coming months the dollar will rise sharply vs. the pound. What should Dash do to act on his speculation?
A) Buy a call on the pound.
B) Sell a call on the pound.
C) Buy a put on the pound.
D) Sell a put on the pound.

Question

Quizplus · Accepted Answer

If Dash believes that the dollar will rise sharply against the pound in the coming months, he should buy a put option on the pound. A put option gives the buyer the right to sell the underlying currency (pound in this case) at a specified price (strike price) on or before a specified date (expiration date). If the pound declines in value against the dollar, the put option will increase in value, allowing Dash to sell it for a profit. On the other hand, if Dash were to sell a call on the pound, it would require him to deliver the pound at a fixed price, which would result in a loss if the pound declined in value.

Dash Brevenshure Works for the Currency Trading Unit of ING