a)A dealer sold a put option on Canadian dollars for $.05 per unit. The strike price was $.78, and the spot rate at the time the option was exercised was $.74. Assume that the dealer immediately sold off the Canadian dollars received when the option was exercised. Also assume that there are 50,000 units in a Canadian dollar option. What was the dealer’s total net profit/loss on the put option? b) A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is $.65, what is the total amount paid by the corporation if it acts rationally? c) On January 1st, a US firm ordered raw material from Japan and agreed to pay 100 million yen for this order on April 1st. It negotiated a 3-month forward contract to obtain 100 million Japanese yen on that date at $.009. On February 1st, the Japanese firm informed the US firm that it will not be able to fulfil that order. The Japanese yen spot rate on February 1stis $.0087 and 2-month forward rate exhibits 3% discount. What should the US firm do now? What would be the profit/loss to the US firm as a result of this action?
a)A dealer sold a put option on Canadian dollars for $.05 per unit. The strike price was $.78, and the spot rate at the time the option was exercised was $.74. Assume that the dealer immediately sold off the Canadian dollars received when the option was exercised. Also assume that there are 50,000 units in a Canadian dollar option. What was the dealer’s total net profit/loss on the put option? b) A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is $.65, what is the total amount paid by the corporation if it acts rationally? c) On January 1st, a US firm ordered raw material from Japan and agreed to pay 100 million yen for this order on April 1st. It negotiated a 3-month forward contract to obtain 100 million Japanese yen on that date at $.009. On February 1st, the Japanese firm informed the US firm that it will not be able to fulfil that order. The Japanese yen spot rate on February 1stis $.0087 and 2-month forward rate exhibits 3% discount. What should the US firm do now? What would be the profit/loss to the US firm as a result of this action?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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- a)A dealer sold a put option on Canadian dollars for $.05 per unit. The strike price was $.78, and the spot rate at the time the option was exercised was $.74. Assume that the dealer immediately sold off the Canadian dollars received when the option was exercised. Also assume that there are 50,000 units in a Canadian dollar option. What was the dealer’s total net
profit/loss on the put option?
- b) A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is $.65, what is the total amount paid by the corporation if it acts rationally?
- c) On January 1st, a US firm ordered raw material from Japan and agreed to pay 100 million yen for this order on April 1st. It negotiated a 3-month forward contract to obtain 100 million Japanese yen on that date at $.009. On February 1st, the Japanese firm informed the US firm that it will not be able to fulfil that order. The Japanese yen spot rate on February 1stis $.0087 and 2-month forward rate exhibits 3% discount.
What should the US firm do now?
What would be the profit/loss to the US firm as a result of this action?
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