Assume the current spot rate is $1.1201/, and U.S. Dollar ($) is the home currency. A...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Assume the current spot rate is $1.1201/€, and U.S. Dollar ($) is the home currency. A CALL option on Euro (€) has a strike price of $1.2040/€ and a premium of $0.00038/€. Assume a U.S. company will purchase the option for hedging a cash flow amounting to €1m Account Payable due in 6 months. The weighted average cost of capital (WACC) of the purchaser is 15% p.a. i. Determine break-even price for the option. ii. For a buyer, when the spot rate is $1.2404/€, is the option at-the-money, or in-the-money, or out-of-the- iii. Determine net profit for the option if the spot rate is $1.2770/€. iv. Assume 6 months forward rate is $1.1825/€. Is the forward market hedge or the option market hedge a better choice for the company? Show relevant calculations. better choice for the company? Show relevant calculations. [Hint: For (iv), do a similar transaction exposure calculation like we have covered during week 7. For option hedging, note that premium is given in dollar per foreign currency amount rather than as a percentage. Thus, a premium of $0.0001/¥ means, for an option amounting to ¥10,000, the premium paid is: ¥10,000 x $0.0001/¥ = $1. Similar idea is to be used in this math] Assume the current spot rate is $1.1201/€, and U.S. Dollar ($) is the home currency. A CALL option on Euro (€) has a strike price of $1.2040/€ and a premium of $0.00038/€. Assume a U.S. company will purchase the option for hedging a cash flow amounting to €1m Account Payable due in 6 months. The weighted average cost of capital (WACC) of the purchaser is 15% p.a. i. Determine break-even price for the option. ii. For a buyer, when the spot rate is $1.2404/€, is the option at-the-money, or in-the-money, or out-of-the- iii. Determine net profit for the option if the spot rate is $1.2770/€. iv. Assume 6 months forward rate is $1.1825/€. Is the forward market hedge or the option market hedge a better choice for the company? Show relevant calculations. better choice for the company? Show relevant calculations. [Hint: For (iv), do a similar transaction exposure calculation like we have covered during week 7. For option hedging, note that premium is given in dollar per foreign currency amount rather than as a percentage. Thus, a premium of $0.0001/¥ means, for an option amounting to ¥10,000, the premium paid is: ¥10,000 x $0.0001/¥ = $1. Similar idea is to be used in this math]
Expert Answer:
Answer rating: 100% (QA)
Lets break down each question and handle them one by one i Determine breakeven price for the option The breakeven price for the option is the strike price plus the option premium This gives the price ... View the full answer
Related Book For
International Financial Management
ISBN: 978-1107111820
3rd edition
Authors: Geert Bekaert, Robert Hodrick
Posted Date:
Students also viewed these finance questions
-
A currency dealer, Nancy Wood, working for a U.S. bank took a 5,000,000 British pound short position when the exchange rate for the dollar/ was $1.5500. The exchange rate then changed to $1.6100. a....
-
A 3-months USD call option with an exercise price of USD 1= SGD 1.75 is selling at SGD 0.03 per USD. a) Assume the current spot rate is USD 1= SGD 1.70 i) is the call option in-the-money,...
-
a. Stock market index information: S&P 500 (stock) index level: Nasdaq Composite (stock) index level: b. Interest rate information : Prime rate: Federal funds rate: Commercial paper rate (90 days):...
-
Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them...
-
Express as a decimal number without using powers of 10 notations: (a) 3 x 10 4 (b) 6.2 x 10 -3 (c) 4 x 10 -6 (d) 2.17 x 10 5
-
Repeat the example in Section 6.1 using \(x(t)=u(t) \exp (-\alpha t)\). Example 6.1 Compute the maximum instantaneous SNR at the output of a linear filter whose impulse response is matched to the...
-
The Pruitt Company's income statement and comparative balance sheets as of December 31 of 2019 and 2018 follow: During the year, the company sold for \(\$ 15,000\) cash old equipment that had cost...
-
This problem continues the Davis Consulting situation from Problem P10-23. Davis Consulting believes the company will need to borrow $ 300,000 in order to expand operations. Davis consults the bank...
-
You know that the return of Cycles - r - us s ordinary shares reacts to macroeconomic information 1 . 0 0 more times than the return of the market. If the risk - free rate of return is 4 . 8 0 per...
-
The "You" Attitude Rewrite the following sentences to reflect your audience's viewpoint. 1. We request that you use the order form supplied in the back of our catalog. 2. We insist that you always...
-
Use Green's Theorem to evaluate the following integral, (erz +20y) dx + (1014 - 20x) dy where C is the curve that starts at the origin, and then goes along a straight line to the point (7, 7), and...
-
Application Question(s) Project Description in this grop project, de will work in groups of the problems The goal is to develop a simple as pplicat that ang abs and Project Problem Statement Create a...
-
What should be the relation between share values and other economic criteria in a corporation?
-
Gerald is a safety inspector that works for ABC Inc. ("ABC"). Four months ago he discovered that the machines used at ABC's factory could potentially malfunction and injure workers using the machine....
-
Federalism in the United States has evolved since this country's founding. The federal government and state governments frequently disagree on each other's roles or responsibilities. When these...
-
Clayton Industries has the following account balances: Current assets $ 2 4 , 0 0 0 Current liabilities $ 8 , 0 0 0 Noncurrent assets 8 9 , 0 0 0 Noncurrent liabilities 5 4 , 0 0 0 Stockholders...
-
Implement the following pseudo-code in assembly language to calculate the sum of the first N elements in the series: 3,(3-1)*2=4, (4-1)*2=6, (6-1)*2=10,. Use the following design: K = 3, Sum = 0 FOR...
-
Briefly describe the following types of group life insurance plans: a. Group term life insurance b. Group accidental death and dismemberment insurance (AD&D) c. Group universal life insurance d....
-
With the variables as in Problem 3, use put-call parity to determine the yen price of the corresponding dollar put option with the same maturity and same strike price.
-
Suppose a trader sells a call option on 500,000 with a delta of 0.35 and buys another call option on 1,000,000 with different parameters whose delta is 0.55. What is his net exposure to small...
-
What is a dual-currency bond?
-
Match each of the following roles of a cost management system, 1 through 6 , with the most appropriate example, a through \(f\). Cost Management System Role 1. Develop accurate product/ service costs...
-
A cost management system is made up of three primary elements: (1) motivational elements, (2) informational elements, and (3) reporting elements. Classify each of the following items, a through...
-
Stock options and stock grants are often utilized to compensate executives. The general rule is that the fair value of the compensation award is determined at the grant date and expense is recognized...
Study smarter with the SolutionInn App