Suppose an Australian importer has to make a 100,000 payment to a German exporter in 60...

 

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Suppose an Australian importer has to make a €100,000 payment to a German exporter in 60 days. The importer could purchase a European call option to have the euros delivered to him at a specified exchange rate (the strike price) on the due date. Suppose further that the option premium is AUD0.015 per euro and the exercise price is AUD1.50. Discuss the following status/scenarios of this call option for the Australian importer: i. If the Spot rate were to rise to AUD1.55 or fall to AUD1.45 indicate whether the option is in-the-money or out-of-the-money for each scenario and will the importer exercise or let the option lapse and why? ii. What is the cost of this option? ii. When is the importer indifferent about exercising or letting the option lapse? iv. Alternative hedging strategies are forwards and futures. How do they differ from options? Suppose an Australian importer has to make a €100,000 payment to a German exporter in 60 days. The importer could purchase a European call option to have the euros delivered to him at a specified exchange rate (the strike price) on the due date. Suppose further that the option premium is AUD0.015 per euro and the exercise price is AUD1.50. Discuss the following status/scenarios of this call option for the Australian importer: i. If the Spot rate were to rise to AUD1.55 or fall to AUD1.45 indicate whether the option is in-the-money or out-of-the-money for each scenario and will the importer exercise or let the option lapse and why? ii. What is the cost of this option? ii. When is the importer indifferent about exercising or letting the option lapse? iv. Alternative hedging strategies are forwards and futures. How do they differ from options?

Answer rating: 100% (QA)

ANSWER i As the importer is taking up a call option he is profited if the spot rate of the Euro is g... View the full answer