Sally works for a company that needs to sell 10 mio EUR and buy Norwegian Krona (NOK)
Question:
Sally works for a company that needs to sell 10 mio EUR and buy Norwegian Krona (NOK) for delivery exactly three months from now (now is today, time zero).
The current spot rate is 5.21 NOK = 1 EUR. The current forward rate for delivery in 3 months is 5.2450 NOK = 1 EUR. There is a put option with strike 5.24 (i.e., 5.24 NOK per EUR) whose price today is 0.06 NOK per EUR available to trade in the market. There is a call option with strike 5.24 (i.e., 5.24 NOK per EUR) whose price today is 0.0675 NOK per EUR available to trade in the market. The options have three months maturity.
Suppose that the spot exchange rate in 3 months from now is S_{3m}, how many NOK can Sally's company buy is the essence of the following series of questions. We try values of S_{3m} = {5.2000, 5.2100, 5.2400, 5.2450, 5.2500, 5.3000, 5.5000} (in essence, all eight questions, Q1 to Q8, can be thought of as a scenario analysis or as a "what-if "analysis).
The questions ask you to consider using an option OR using a forward contract (but never both at the same time). Sally must sell the 10 mio EUR three months from now and buy as many NOK as possible so her company can pay the staff and rent costs of their operations in Norway. Give your answers to the nearest NOK.
In the questions where Sally uses options, you neglect the time value of money associated with the option premium. However, in the questions where Sally uses options, you include the cost of the options when working out how many NOK Sally buys in exchange for 10 mio EUR.
Q1: If Sally uses a forward contract (but NO options), how many NOK does Sally buy?
In the rest of the questions, Sally uses options (and no forward contract).
Q2: If Sally uses options, and S_{3m} turns out to be 5.2000 NOK per EUR, how many NOK does Sally buy?
Q3: If Sally uses options, and S_{3m} turns out to be 5.2100 NOK per EUR, how many NOK does Sally buy?
Q4: If Sally uses options, and S_{3m} turns out to be 5.2400 NOK per EUR, how many NOK does Sally buy?
Q5: If Sally uses options, and S_{3m} turns out to be 5.2450 NOK per EUR, how many NOK does Sally buy?
Q6: If Sally uses options, and S_{3m} turns out to be 5.2500 NOK per EUR, how many NOK does Sally buy?
Q7: If Sally uses options, and S_{3m} turns out to be 5.3000 NOK per EUR, how many NOK does Sally buy?
Q8: If Sally uses options, and S_{3m} turns out to be 5.5000 NOK per EUR, how many NOK does Sally buy?
Expert Answer:
Q1 If Sally uses a forward contract but NO options how many NOK does Sally buy If Sally uses a forward contract the amount of NOK she can buy will depend on the forward rate for delivery in 3 months T... View the full answer
