Assume the current spot rate is $1.1701/, and U.S. Dollar ($) is the home currency. A...
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Assume the current spot rate is $1.1701/€, and U.S. Dollar ($) is the home currency. A CALL option on Euro (€) has a strike price of $1.2040/€ and a premium of $0.00041/€. i. Determine break-even price for the option. ii. For a buyer, when the spot rate is $1.0505/€, is the option at-the-money, or in-the-money, or out-of- the-money? iii. Determine net profit or loss for the option for a buyer if the spot rate is $1.2770/€. iv. Assume a U.S. company will purchase the option for hedging a cash flow amounting to €2.5m Account Payable due in 3 months. The weighted average cost of capital (WACC) of the purchaser is 15% p.a. Determine the company's cost for using option market hedge. Assume the current spot rate is $1.1701/€, and U.S. Dollar ($) is the home currency. A CALL option on Euro (€) has a strike price of $1.2040/€ and a premium of $0.00041/€. i. Determine break-even price for the option. ii. For a buyer, when the spot rate is $1.0505/€, is the option at-the-money, or in-the-money, or out-of- the-money? iii. Determine net profit or loss for the option for a buyer if the spot rate is $1.2770/€. iv. Assume a U.S. company will purchase the option for hedging a cash flow amounting to €2.5m Account Payable due in 3 months. The weighted average cost of capital (WACC) of the purchaser is 15% p.a. Determine the company's cost for using option market hedge.
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SOLUTION i The breakeven price for the option can be calculated by adding the strike price to the pr... View the full answer
Related Book For
Multinational Business Finance
ISBN: 978-0133879872
14th edition
Authors: David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett
Posted Date:
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