You work for SABMiller plc in London. You have an accounts payable balance of 10 million Chinese
Question:
a. How much would you be willing to pay for this call option assuming the Biger-Hull currency option pricing model is correct?
b. Holding everything else constant, would you be willing to pay more or less for this option given each of the following changes?
i) The exchange rate increases to £0.0950/CNY
ii) The exercise price is increased to K£/CNY = £0.11/CNY
iii) The risk-free rate increases to iF£ = 2.1 percent in sterling
iv) The risk-free rate increases to iFCNY = 3.1 percent in yuan
v) The time to expiration increases from one to two years
vi) Exchange rate volatility increases to σ = 40 percent per year.
Describe the intuition behind each of these effects on the value of the currency call option?
c. Repeat steps a and b for a put option on yuan. Accounts Payable
Accounts payable (AP) are bills to be paid as part of the normal course of business.This is a standard accounting term, one of the most common liabilities, which normally appears in the balance sheet listing of liabilities. Businesses receive... Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...
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Related Book For
Multinational Finance Evaluating Opportunities Costs and Risks of Operations
ISBN: 978-1118270127
5th edition
Authors: Kirt C. Butler
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