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?
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?
Chapter5: Currency Derivatives
Section: Chapter Questions
Problem 4ST
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- 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 compensatory payment and which party receives it?
- Su ppose that at the expiry date of the FRA, the 6-month interest rate is 0.79% per annum and the 9-month interest rate is 0.86% per annum, calculate the compensatory payment and which party receives it?
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