Q1. Suppose a Bangladeshi exporter is expecting to receive $15 million sometime in the next three months from an American importer. To hedge this, the Bangladeshi exporter buys an option on the USS. The premium is 0.55 BDT/USS, for options with Exercise price = 0.551 a) What option should he buy? b) What is the cost incurred today by the Bangladeshi exporter? c)) What is the price floor that the exporter has set on the price of US$ 84.5 BDT/USS.? d) What is the actual amount that the exporter will receive if the spot rate at the end of three months is 85.5 BDT/USS? e) What is the actual amount that the BD exporter will receive if the spot rate at the end of three months is 84.5 BDT/USS? Q2. Suppose a Bangladeshi importer is expecting to pay $15 million sometime in the next three months to an American exporter. To hedge this, the Bangladeshi importer buys an option on the US$. The premium is 0.75 BDT/US$, for options with Exercise price = 86.5 BDT/US$. a) What option should he buy? b) What is the cost incurred today by the Bangladeshi importer? c) What is the ceiling that the importer has set on the price of US$? d) What is the actual amount that the importer will pay if the spot rate at the end of three months is 87.75 BDT/US$? Draw a diagram to show your answer.

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
icon
Related questions
Question
Q1. Suppose a Bangladeshi exporter is expecting to receive
$15 million sometime in the next three months from an
American importer. To hedge this, the Bangladeshi exporter
buys an option on the USS. The premium is 0.55 BDT/USS, for
options with Exercise price = 0.551
a) What option should he buy?
b) What is the cost incurred today by the Bangladeshi
exporter?
c) ) What is the price floor that the exporter has set on the
price of US$ 84.5 BDT/USS.?
d) What is the actual amount that the exporter will receive if
the spot rate at the end of three months is 85.5 BDT/USS?
e) What is the actual amount that the BD exporter will receive
if the spot rate at the end of three months is 84.5 BDT/USS?
Q2. Suppose a Bangladeshi importer is expecting to pay $15
million sometime in the next three months to an American
exporter. To hedge this, the Bangladeshi importer buys an
option on the US$. The premium is 0.75 BDT/US$, for options
with Exercise price = 86.5 BDT/US$.
a) What option should he buy?
b) What is the cost incurred today by the Bangladeshi
importer?
c) What is the ceiling that the importer has set on the price of
US$?
d) What is the actual amount that the importer will pay if the
spot rate at the end of three months is 87.75 BDT/US$? Draw a
diagram to show your answer.
Transcribed Image Text:Q1. Suppose a Bangladeshi exporter is expecting to receive $15 million sometime in the next three months from an American importer. To hedge this, the Bangladeshi exporter buys an option on the USS. The premium is 0.55 BDT/USS, for options with Exercise price = 0.551 a) What option should he buy? b) What is the cost incurred today by the Bangladeshi exporter? c) ) What is the price floor that the exporter has set on the price of US$ 84.5 BDT/USS.? d) What is the actual amount that the exporter will receive if the spot rate at the end of three months is 85.5 BDT/USS? e) What is the actual amount that the BD exporter will receive if the spot rate at the end of three months is 84.5 BDT/USS? Q2. Suppose a Bangladeshi importer is expecting to pay $15 million sometime in the next three months to an American exporter. To hedge this, the Bangladeshi importer buys an option on the US$. The premium is 0.75 BDT/US$, for options with Exercise price = 86.5 BDT/US$. a) What option should he buy? b) What is the cost incurred today by the Bangladeshi importer? c) What is the ceiling that the importer has set on the price of US$? d) What is the actual amount that the importer will pay if the spot rate at the end of three months is 87.75 BDT/US$? Draw a diagram to show your answer.
Expert Solution
steps

Step by step

Solved in 3 steps with 2 images

Blurred answer
Knowledge Booster
Foreign Exchange Market
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education