1) You are US company, 500,000 BP (British Pound) payable to UKin one year. Answer in terms of US$.
Information for Forward Contract:
Forward exchange rate (one yr): 1.54 $/BP
Information for Money Market Instruments(MMI):
Current exchange rate: 1.50 $/BP
Investment return at Aerion Fund Management (in UK): 4%annual
Interest rate of borrowing from Bank of America (in USA): 2%annual
Information you need for Currency OptionsContract:
Options premium: 0.015 $/BP
Interest rate of borrowing from Bank of America (USA): 2%annual
Allowed to exercise options at 1.54 $/BP
What are the costs of MMI? (Answer in US$ of course. You are UScompany!)
2) You are US company, 500,000 BP (British Pound) payable to UKin one year. Answer in terms of US$.
Information for Forward Contract:
Forward exchange rate (one yr): 1.54 $/BP
Information for Money Market Instruments(MMI):
Current exchange rate: 1.50 $/BP
Investment return at Aerion Fund Management (in UK): 4%annual
Interest rate of borrowing from Bank of America (in USA): 2%annual
Information you need for Currency OptionsContract:
Options premium: 0.015 $/BP
Interest rate of borrowing from Bank of America (USA): 2%annual
Allowed to exercise options at 1.54 $/BP
If the break-even exchange rate for the Currency OptionsContract is 1.46 $/BP, and you believe the exchange rate at thetime of the payment would be 1.43 $/BP, should you sign thecontract?
