Sherbert Freehills, an Australian firm, does business in Hong Kong. The firm knows that it will receive
Question:
Sherbert Freehills, an Australian firm, does business in Hong Kong. The firm knows that it will receive a payment of 10M Hong Kong Dollars (HKD) within 4 months but does not know the exact date of payment. Assume that the firm would immediately convert all HKD to AUD upon receiving the payment. Suppose the following financial derivatives are available to Sherbert Freehills: put options on the HKD with a strike price of EAUD/HKD=6.5 and a premium of $0.005 per HKD; call options on the HKD with a strike price of EAUD/HKD=6.5 and a premium of $0.004 per HKD. Both options are available in American and European forms and have a time-to-expiry of 4 months. Which of the following is the optimal strategy by Sherbert Freehills to hedge against any unfavourable exchange rate movements?
Statistics for Business and Economics
ISBN: 978-0132930192
8th edition
Authors: Paul Newbold, William Carlson, Betty Thorne