A U.S. company has British pound 2 million payables in 90 days. The company decide to use option contracts to manage its FX risk from this international transactionand has the following information about the option contracts.A 90 day call option contract for BP 2 million with strike rate = $1.74/BP, call premium per British pound is $0.02•A 90 day put option contract for BP 2 million with strike rate = $1.75/BP, put premium per British pound is $0.02Which option contract the company need to purchase?write a call optionO purchase a call optionpurchase a put optionOwrite a put option

How a put option helps manage FX risk:A put option gives the holder the right, but not the…

Answered: A U.S. company has British pound 2…

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 50QA

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A U.S. company has British pound 2 million payables in 90 days. The company decide to use option contracts to manage its FX risk from this international transaction and has the following information about the option contracts. A 90 day call option contract for BP 2 million with strike rate = $1.74/BP, call premium per British pound is $0.02 A 90 day put option contract for BP 2 million with strike rate = $1.75/BP, put premium per British pound is $0.02 Calculate US$ cost or US$ net revenue of the US company at the expiration date of the option based on the decision O $3.54 million O $3.56 million $3.48 million O $3.52 million
1
UCD (U.S. based MNC) will receive 250,000 euros in one year. The spot exchange rate today is $1.20 per euro. It observes that1. The one-year interest rate for euros is 8%, and the one-year interest rate for U.S. dollars is 3%.2. In the option market, there is one-year call option or put option available. Both options have the same exercise price of $1.18 per euro, and a premium of $0.02 per euro.3. In the forward market, the one-year forward rate exhibits a 5% discount from the current spot exchange rate. How should UCD utilize the forward market to hedge the exchange rate risk for its future receivables? And what shall be the amount received based on this hedging strategy? (Note: UCD can only buy or sell the forward contract at the forward rate available in the forward market described in bullet 3.)
An American firm has just sold merchandise to a British customer for £100,000, with payment in British pounds 3 months from now. The US company has purchased from its bank a 3-month put option on £100,000 at a strike price of $1.6660 per pound and a premium cost of $0.01 per pound. On the day the option matures, the spot exchange rate is $1.7100 per pound. Should the US company exercise the option at that time or sell British pounds in the spot market?
A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit. Firm A wants to borrow €1,000,000 for one year and B wants to borrow $2,000,000 for one year. The spot exchange rate is $2.00 = €1.00, a swap bank makes the following quotes for 1-year swaps and AAA-rated firms against USD LIBOR. USD Euro Bid Ask Bid Ask 8 % 8.1 % 6 % 6.1 % The firms external borrowing opportunities are: € borrowing $ borrowing A € 7 % $ 8 % B € 6 % $ 9 % Is there a mutually beneficial swap? Yes, Firm A swaps with the swap bank, $ at bid and € at ask. Firm B swaps with the swap bank, $ at ask and € at bid. Firms A and B would each save 90bp and the swap bank would earn 20bp. There is no mutually beneficial swap at these prices. Yes, Firm A swaps…
A U.S. firm holds an asset in France and faces the following scenario: State 1 25% Probability Spot rate. P* P State 2 25% a Exposure b. Variance C. Variance State 3 258 $ 2.20 per euro € 1,500 $ 2,200 In the above table, P is the euro price of the asset held by the U.S. firm and Pis the dollar price of the asset. Required: a. Compute the exchange exposure faced by the U.S. firm. b. What is the variance of the dollar price of this asset if the U.S. firm remains unhedged against this exposure? c. If the U.S. firm hedges against this exposure using a forward contract, what is the variance of the dollar value of the hedged position? $ 2.10 per euro € 1,400 $ 1,940 State 4 25% $ 2.00 per euro € 1,300 $ 1,500 $ 1.90 per euro € 1,200. $ 1,280
The current spot exchange rate is 1.27 $/ BP. Your customer is an importer from Britain. He will have to pay 10 million BP in three months. The following currency options (prices are in Dollars for BP delivery) are available: Which option will you recommend for hedging the BP liability (Put or Call)? Explain the customer the difference between the two strikes by comparing them to an unhedged position. In your explanation use as an example exchange rates of 1.35$/BP and 1.24$/BP in three months. Show (calculate) the payable total cost under the two exchange scenarios and three hedging choices (1: unhedged, 2: 1.25 strike hedge and 3: 1.30 hedge); you can disregard the time value of money of the premium payment.
A U.K importer has future payables of DM 20,000,000 in one year. The importer mustdecide whether to use option or a money market to hedge this position. The followinginformation is availableSpot rate £ 0.74 =DM1One year call optionExercise Price £ 0.76= DM1Premium £ 0.04 per DMOne year Put OptionExercise Price £ 0.77 =DMPremium £ 0.02 per DMSterling Deposit Rate 8% Per AnnumSterling Borrowing Rate 9% Per AnnumDM Deposit Rate 6% Per AnnumDM Borrowing Rate 7% Per AnnumForecast one-spot Rate £ 0.70 £0.77 £0.70Probability 25% 55% 20%Required:Assume that the importer’s objective is to minimize the sterling value of DM payables.Which of the hedging instruments would you recommend? Verify your answer by estimatingthe sterling cost for each type of hedge. Compare cost of hedging and non-hedging
The current spot rate of Singapore dollar (SGD) is 0.50 USD/SGD. You bought a six-month European put option on SGD which has strike price of 0.55 USD/SGD and a premium 0.01 USD/SGD. Each put option contract trades 1,000,000 Singapore Dollars. Calculate your gain/loss in the put option contract if the market exchange rate turns out to be 0.52 USD/SGD on the contract maturity date. A. 20,000 USD gain. B. 10,000 USD loss. C. 40,000 USD gain. D. 10,000 USD gain.
Suppose that you are a finance manager at a U.S. based MNC. On January 1st, you anticipate you will need to purchase C$170,000.00 (Canadian dollars) worth of supplies from a Canadian supplier in March using Canadian dollars (C$). The current spot rate for the Canadian dollar is $0.73. In order to lock in spot rate for this exchange, you purchase a futures contract specifying C$170,000.00 at $0.73 per Canadian dollar with a March 10th settlement date. On the settlement date, your MNC will need to pay (U.S. dollars) for the C$170,000.00.
Suppose that you are a speculator that anticipates an appreciation of the Singapore dollar (S$). You purchase a call option contract on Singapore dollars. Each contract represents S$25,000, with a strike price of $0.86 and call option premium of $0.02 per unit. Suppose that the spot price of the Singapore dollar is $0.92 just before the expiration of the call option contract. At this time, you call the contract and immediately sell the Singapore dollars to a bank at the current spot price. Now consider this scenario from the perspective of the individual or firm that sold you the call option. Note: Assume there are no brokerage fees. Use the drop-down selections to fill in the following table from the sellers perspective. Transaction Selling Price of S$ - Purchase Price of S$ + Premium Paid for Option = Net Profit Per Unit $0.86 -$0.92 $0.02 Per Contract $21,500 $12,900 $27,950
Suppose that you are a speculator that anticipates an appreciation of the Singapore dollar (S$). You purchase a call option contract on Singapore dollars. Each contract represents S$25,000, with a strike price of $0.86 and call option premium of $0.02 per unit. Suppose that the spot price of the Singapore dollar is $0.92 just before the expiration of the call option contract. At this time, you call the contract and immediately sell the Singapore dollars to a bank at the current spot price. Use the drop-down selections to fill in the following table from your (the buyer's) perspective. Note: Assume there are no brokerage fees. Transaction Selling Price of S$ - Purchase Price of S$ Premium Paid for Option Net Profit = Per Unit $0.92 -$0.86 -$0.02 Per Contract $23,000 $18,400 $13,800

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