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 $0.02Based on the option the US company purchased, 90 days later if the spot rate becomes $1.7900/BP, what would be the company's decision for the option?O OTM; let the option expireO ITM; let the option expireO ITM; exercise the optionO OTM; exercise the option

Market Favors the Company: The key factor is the spot rate becoming $1.79/BP in 90 days. This means…

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

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter27: Multinational Financial Management

Section: Chapter Questions

Problem 7MC

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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 Which option contract the company need to purchase? write a call option O purchase a call option purchase a put option Owrite a put option
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
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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
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 Canadian supplier is offering two options to his American client to pay for an equipment: paying 13,000 Canadian dollars now or paying 10,000 US dollars in 6 months. If the annual interest rate for the Canadian dollar is 5% and for the US dollar is 8%, what is the "implied" exchange rate? Question 5 options: CAD0.7581/USD. CAD1.3520/USD. CAD0.7505/USD. CAD1.3190/USD. CAD1.3325/USD. CAD0.7396/USD.
Suppose a German importer owes an Australian exporting company 150,000 AUD, due in three months. What is the expected value of payables in AUD under hedge?
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…
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 New Zealand company will receive a payment in USD in one year. It wants to hedge its exchange rate risk exposure. It will do this by entering into a currency forward contract to buy NZD in exchange for USD in one year. Use this information to help answer the questions that follow. (a) The current spot exchange rate for the New Zealand dollar per US dollar (NZD/USD) is 1.5836. The one-year risk-free rates are 2.0% for the New Zealand dollar and 3.5% for the US dollar. According to CIP, the no-arbitrage one-year NZD/USD forward exchange rate is closet to: Select alternative ✓ (b) Suppose that the company decides to wait a few more weeks before hedging. It then enters into a currency forward contract to buy NZD in exchange for USD at a rate of 1.5502 NZD per USD. A year later, when the company receives the USD payment, the spot NZD/USD exchange rate is 1.6123. In this case, the company would have been Select alternative if it had not hedged.
BK Inc. has $100,000 that can be used for arbitrage in the forex market. The interest rate is US is 4% and in Europe is 5%. The current exchange rate USD to EUR is 0.87. The company expects that after a year, the exchange rate may not be favourable and executes a forward contract at EUR to USD 1.23. Calculate the net profit or loss of this covered interest arbitrage if the investment is made in Europe. Answer Choices: a. The net profit is $8,360.50 The net loss is $4,000.00 b. c. The net profit is $5,360.50 d. The net loss is $1,000.00

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