An investor is analyzing the costs of two-year, European options for aluminum and zinc at a particular strike price. For each ton of aluminum, the two-year forward price is 1400, a call option costs 700, and a put option costs 550. For each ton of zinc, the two-year forward price is 1600 and a put option costs 550. The annual effective risk-free interest rate is 6%. Calculate the cost of a call option per ton of zinc.

A U.K. company is currently selling vases in the U.S. with the below information: Sales Price Exchange Rate 200,000 $5 $1.25/£ Our company predicts that the pound will appreciate soon by 4%, after which the exchange rate will remain unchanged in perpetuity.  Production is based in the U.S., and variable costs are $2 per unit, and there are no fixed costs or depreciation/amortization.  The U.K. corporate tax rate is 25%.  At the end of each year, the net working capital is expected to be equal to one-fourth variable costs.  The company is choosing to keep its selling price constant, which will maintain their sales volume; and they use a WACC of 10%.

a.  What is the impact of the depreciation of the dollar on the value of the company?

b.  Describe how the company could fully hedge their exposure in the forward market. (Buy or sell forward, what currency, how much)

c.  Should they leave the U.S. market if the prediction for the pound was appreciation of 20% instead of 4%? 

Answer rating: 100% (QA)

SOLUTION Question 1 To calculate the cost of a call option per ton of zinc we need to use the putcall parity formula Call option cost Put option cost ... View the full answer