Part A. Your company (company ABC) will receive $27 million in one year, which will be...

 

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Part A. Your company (company ABC) will receive $27 million in one year, which will be exchanged it into pounds (£). There are three alternatives you are considering. You are required to calculate the pounds proceeds for each alternative. Explain your answers. If the £ proceeds are uncertain, explain how they will vary. Which alternative would you choose, and why? Discuss. a) Exchange at the £/$ spot rate in one year. The current spot rate is £0.83/$. b) Exchange using a forward FX contract at the forward rate of £0.87/$. c) Buy a currency option. A bank is offering an option with a contract size of $27 million, an exercise price of £0.89/$ and an expiry date in one year. The cost of a call option on $27 million is £420,000 and of a put option is £460,000, payable now. The interest rate in £ is 2% p.a. Draw a diagram for the option. Part A. Your company (company ABC) will receive $27 million in one year, which will be exchanged it into pounds (£). There are three alternatives you are considering. You are required to calculate the pounds proceeds for each alternative. Explain your answers. If the £ proceeds are uncertain, explain how they will vary. Which alternative would you choose, and why? Discuss. a) Exchange at the £/$ spot rate in one year. The current spot rate is £0.83/$. b) Exchange using a forward FX contract at the forward rate of £0.87/$. c) Buy a currency option. A bank is offering an option with a contract size of $27 million, an exercise price of £0.89/$ and an expiry date in one year. The cost of a call option on $27 million is £420,000 and of a put option is £460,000, payable now. The interest rate in £ is 2% p.a. Draw a diagram for the option.

Answer rating: 100% (QA)

a converting into Rate at spot 083 27 million 083 x 27 million 2241 million b use ... View the full answer