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Your company (US-based organization) is expected to receive 4 million British pounds in nine months. You...

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Finance

Your company (US-based organization) is expected to receive 4million British pounds in nine months. You decide to use Europeancall options to fully hedge against your currency risk. Each calloption has 500,000 pounds attached and has an exercise price andpremium of $1.25/pound and $.75/pound, respectively. The spot pricefor pounds the day that you established your hedge was$1.2/pound.

Find the exercise value (in dollars) of the call options on theday you created your hedge. Round intermediate steps and your finalanswer to four decimals.

Find the time value (in dollars) of the call options on the dayyou created your hedge.  

  • .75
  • 0
  • 1.25
  • .5
  • .05

Find your profit/loss (in dollars) from your options if thedollar/pound spot price is $1.3/pound when the options expire.

  • $3 million
  • -$2.8 million
  • $2.8 million
  • -$3 million

Find your profit/loss (in dollars) from your options if thedollar/pound spot price is $1.1/pound when the options expire.

  • -$3.6 million
  • $3.6 million
  • -$3 million
  • $3 million

Answer & Explanation Solved by verified expert
4.0 Ratings (573 Votes)
Excercise price per pound 125 Premium paid per pound 075 Value of call option Spot price on Expirtaion Excercise price Net profit or loss Value of option Premium paid If stock price is less than Excercise price option will not be excercised by    See Answer
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