Suppose CM Capital is negotiating a financing deal with a hot startup firm. If the negotiation is successful, which will be known in three months, the venture capitalist is going to commit CNY10,000,000 as the first installment. To hedge the contingent exposure, the venture capitalist plans to buy options on Chinese yuan.

a. What type of option should CM Capital buy, Call or Put? Why? b. Suppose the strike price of the option is 6.90/$; the call option premium is $0.007 per yuan; the put option premium is 0.009 per yuan. What will CM Capital do in the following four scenarios and what's the payoff/payment in dollars in each scenario? (1) Negotiation is successful and spot rate is 6.80/$. (2) Negotiation is successful and spot rate is 7.00/$. (3) Negotiation fails and spot rate is 6.80/$. (4) Negotiation fails and spot rate is 7.00/$.

 What is the price of a 2-year bond with face value $1,000 and a coupon rate of 5%? Suppose the market interest rate is 6%.

Answer rating: 100% (QA)

a CM Capital should buy a Put option A Put option gives the holder the right to sell an asset at a specified price within a specific time frame In thi... View the full answer