FAB Corporation will need 200,000 Canadian dollars (C$) in 90 days to cover a payable position. Currently, a 90-day call option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73 and a premium of $.01 is available. FAB plans to purchase options to hedge its payable position. Assuming that the spot rate in 90 days is $.71, what is the net amount paid, assuming FAB wishes to minimize its cost? A. $152,000. B. $144,000. C. $150,000. D. $148,000.

FAB Corporation will need 200,000 Canadian dollars (C$) in 90 days to cover a payable position. Currently, a 90-day call option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73 and a premium of $.01 is available. FAB plans to purchase options to hedge its payable position. Assuming that the spot rate in 90 days is $.71, what is the net amount paid, assuming FAB wishes to minimize its cost? A. $152,000. B. $144,000. C. $150,000. D. $148,000.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter5: Currency Derivatives

Section: Chapter Questions

Problem 4ST

See similar textbooks

Similar questions

MNC needs 400,000 Canadian dollars (C$) in 60 days to cover a payable position. There is a 60-day call option with an exercise price of $.75 and a premium of $.01 is available and a 60-day put option with an exercise price of $.73 and a premium of $.01 is available. MNC plans to purchase options to hedge its payable position. Assuming that the spot rate in 60 days is $.71, what is the net amount paid? Group of answer choices $288,000. $296,000. $304,000. $300,000.
Mender Co. will be receiving 700,000 Australian dollars in 180 days. Currently, a 180-day call option with an exercise price of $.74and a premium of $.02 is available. Also, a 180-day put option with an exercise price of $.72 and a premium of $.02 is available. Mender plans to purchase options to hedge its receivables position. Assume that the spot rate in 180 days is $.73. (1) Should the company use call options or put options? Why? (2) Calculate the amount received from the currency option hedge (after considering the premium paid). (3) Would the company have received more without hedging?
Assume that Smith Corporation will need to purchase 200,000 British pounds in 90 days. A call option exists on British pounds with an exercise price of $1.68, a 90-day expiration date, and a premium of $.04. A put option exists on British pounds, with an exercise price of $1.69, a 90-day expiration date, and a premium of $.03. Smith Corporation plans to purchase options to cover its future payables. It will exercise the option in 90 days (if at all). It expects the spot rate of the pound to be $1.76 in 90 days. Determine the amount of dollars it will pay for the payables, including the amount paid for the option premium. A. $336,000. B. $344,000. C. $332,000. D. $360,000. E. $338,000.
A speculator is considering the purchase of a 6-month Swiss franc call option on 50,000 francs with a strike price of $1.0885/SFr The premium is $0.0075/Sfr. The spot price is $1.0822/Sfr and the 60-day forward rate is $1.0880/SFr. The speculator believes the Franc will appreciate to $1.0994/Sfr over the next six months. What is the profit or loss if the franc appreciates only to the forward rate at the end of the 6 months? A. $170 B. -$235 C. $450 D -$375
Malibu, Inc., is a U.S. company that imports British goods. It plans to use call options to hedge payables of 100,000 pounds in 90 days. Three call options are available that have an expiration date 90 days from now. Fill in the number of dollars needed to pay for the payables (including the option premium paid) for each option available under each possible scenario. Spot Rate of Pound Exercise Price Exercise Price Exercise Price 90 Days = $1.71; = $1.76; = $1.80; Scenario from Now Premium = $.04 Premium = $.06 Premium = $.03 1 $1.65 2 1.74 3…
ECG has purchased an electric power generator from Mitsui Trading Company of Japan. ECG owes Mitsui ¥250 million in six months. The present spot rate is ¥250/$. The six-month forward rate is ¥248/$. ECG can borrow or invest yen at 8% and U.S. dollars at 10% (annual rates). ECG can also purchase a six-month call option on the Stock Exchange at a strike price of ¥250 for a premium of 0.004 cents per yen. Compare the alternative ways ECG can make its payment. Which way do you recommend?
American Express sells a call option on euros (contract size is €500,000) at a premium of $0.04 per euro. If the exercise price is $0.91 and the spot price of the euro at date of expiration is $0.93, what is American express’s profit or loss on this call option?
Based on past experience, Maas Corp. (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 1,200,000 francs on March 15, 2021. To hedge this forecasted transaction, on December 15, 2020, the company acquires a call option to purchase 1,200,000 francs in three months. Maas selects a strike price of $0.68 per franc when the spot rate is $0.68 and pays a premium of $0.005 per franc. The spot rate increases to $0.686 at December 31, 2020, causing the fair value of the option to increase to $10,000. By March 15, 2021, when the raw materials are purchased, the spot rate has climbed to $0.70, resulting in a fair value for the option of $24,000. The raw materials are used in assembling finished products, which are sold by December 31, 2021, when Maas prepares its annual financial statements. Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials. What is the overall impact on net income over…
Based on past experience, Maas Corp. (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 2,000,000 francs on March 15, 2021. To hedge this forecasted transaction, on December 15, 2020, the company acquires a call option to purchase 2,000,000 francs in three months. Maas selects a strike price of $0.79 per franc when the spot rate is $0.79 and pays a premium of $0.003 per franc. The spot rate increases to $0.794 at December 31, 2020, causing the fair value of the option to increase to $13,000. By March 15, 2021, when the raw materials are purchased, the spot rate has climbed to $0.81, resulting in a fair value for the option of $40,000. The raw materials are used in assembling finished products, which are sold by December 31, 2021, when Maas prepares its annual financial statements. Prepare all journal entries for the option hedge of a forecasted transaction and for the purchase of raw materials.
Yoyo, a german company expects to pay US$10 million to a supplier in US. It is now December and the payment is due in March. The current spot rate is 1.2100. The company wants to use currency options to hedge the exposure. March currency put options are available and are for 125,000 euros, have a strike price of $1.2200 and the tick size is $0.0001. The cost of the option contract is 2.75 US cents per euro.Assuming that there is no basis,(i) Devise a hedging strategy for Yoyo using currency options.(ii) Advise on the action to be taken by Yoyo and the outcome in case the spot rate in March when the dollars must be paid is:(a) $1.2500 = €1 (b) $1.1800 = €1
Jobbar sold a put option on British pounds for €.035 per unit. The exercise price was €1.1370, and the spot rate at the time the pound option was exercised was €1.1218. Assume there are 150,250 units in a British pound option. What was Jobbar's per-unit net profit on the option? What was Jobbar's total net profit on the option? Calculate the break-even spot rate (at expiration) for Jobbar. Discuss (briefly) the answer.
Melbourne Capital Ltd considers selling European call options on ANZ Bank Ltd for $1.50 per option. The current market price is $17.70 on 28th September 2020, the exercise price is $20, and the maturity of each call option is 6 months. Under what circumstances does the investor make a profit? Under what circumstances will the option be exercised? How many call options should the investor sell to raise a total capital of $1,260,000? Company A agrees to enter into an FRA agreement with Company B in which Company A borrows $ 40,000,000 in 6-month time for a period of 9 months, and Company B invests $ 40,000,000 in 6-month time for a period of 9 months. The 6-month interest rate is 0.77% per annum and the 9-month interest rate is 0.89% per annum. What is the interest rate that both companies agreed upon? Suppose that at the expiry date of the FRA, the 6-month interest rate is 0.81% per annum and the 9-month interest rate is 0.96% per annum, calculate the…