International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Assume that Kramer Co. will receive SF800,000 in 90 days. Today's spot rate of the Swiss franc is $.62, and the 90-day forward rate is $.635. Kramer has developed the following probability distribution for the spot rate in 90 days: Possible Spot Rate in 90 Days Probability $.61 10% $.63 30% $.64 40% $.65 20% The probability that the forward hedge will result in more dollars received than not hedging is:
a. 20 percent.
b. 40 percent.
c. 60 percent.
d. 30 percent.
e. 10 percent.
Suppose that the current spot price of corn is $720 per bushel. The one year risk-free rate is 6% per annum. The futures price for delivery of one bushel of corn in one year’s time is $792 per bushel. Assume that net costs (storage costs minus convenience yield) are $15 per bushel (over the next one year). Is the futures contract correctly priced? If not, what is the theoretically correct price for the futures contract and how could you take advantage of any mispricing?
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Determine the risk-neutral value of a eight-month European put option to sell a FLB (First Local Bank) share for a price of R400 when the current price is R420, the interest rate is 10%, and the volatility of the security is 0.28?
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- Assume that Epping Co. expects to receive S$500,000 in one year. Epping created a probability distribution for the future spot rate in one year as follows: Future Spot Rate $.68 Probability 20% 62 50 30 61 Assume that one-year put options on Singapore dollars premium of $.04 per unit. One-year call options on Singapore dollars are available with an exercise price of S.60 and a premium of $.03 per unit. a are available, with an exercise price of $0.63 and Use the appropriate options hedge to determine whether the firm would exercise the option using each of the three different spot rates i.e. what would the firm do if each spot rate existed at the time it is considering exercising the option (assume the option is about to expire). Then, show the total amount of receivables (in US dollars) based on the appropriate strategy that would be implemented for each of the three spot rates. Indicate whether the amount would be a maximum or a minimum or neither.arrow_forwardUnion Corp must make a single payment of €5 million in six months at the maturity of a payable to a French firm. The finance manager expects the spot price of the € to remain stable at the current rate of $1.60/€. But as a precaution, the manager is concerned that the rate could rise as high as $1.70/€ or fall as low as $1.50/€. Because of this uncertainty, the manager recommends that Union Corp hedge the payment using either options or futures. Six months Call and Put options with an exercise price of $1.60/€ are available. The Call sells for $.08/€ and the Put sells for $.04/€. A six month futures contract on € is trading at $1.60/€. Should the manager be worried about the dollar depreciating or appreciating? If Union Corp decides to hedge using options, should it buy Calls or Puts to hedge the payment? Why? If futures are used to hedge, should the company buy or sell € futures? Why? What will be the net payment on the payable if an option contact was used? assume…arrow_forwardSuppose that a stock price is currently 35 dollars, and it is known that four months from now, the price will be either 51 dollars or 29 dollars. Find the value of a European call option on the stock that expires four months from now, and has a strike price of 39 dollars. Assume that no arbitrage opportunities exist and a risk-free interest rate of 10 percent.Answer =dollars.arrow_forward
- Assume the spot Swiss franc is $0.7015 and the six-month forward rate is $0.6980. What is the Value of a six-month call and a put option with a strike price of $0.6815 should sell for in a rational market? Assume the annualized six-month Eurodollar rate is 3.50 percent. Assume the annualized volatility of the Swiss franc is 14.20 percent. Use the European option-pricing models to value the call and put option. This problem can be solved using the FXOPM.xls spreadsheet. (Do not round intermediate calculations. Round your answers to 2 decimal places.)arrow_forwardUse the European option pricing formula to find the value of a six-month call option on Japanese yen. The strike price is $1 = ¥100. The spot rate is $1 = ¥100. The volatility is 25 percent per annum; i$ = 5.5% and i¥ = 6%. $0.005395/¥100 $0.005982/¥ $0.0672/100 none of the optionsarrow_forwardAssume the spot Swiss franc is $0.7085 and the six-month forward rate is $0.7120. What is the Value of a six-month call and a put option with a strike price of $0.6885 should sell for in a rational market? Assume the annualized six-month Eurodollar rate is 3.50 percent. Assume the annualized volatility of the Swiss franc is 14.20 percent. Use the European option-pricing models to value the call and put option.arrow_forward
- The market price of a one-year European call option is $9.243, written on a stock that is currently selling for $70. The stock is expected to go ex‑dividend in 6 months on a declared dividend of $5. The exercise price of the call is $80 and the current riskless rate of return is 3% per annum. What is the volatility (standard deviation) implied by the market price of this call option and an appropriate option pricing model allowing for dividends? Your answer should be within 2% of the correct solution (i.e., the correct σ ± .02).arrow_forwardAssume only two states will exist one year from today when a call on Delta Transportation, Inc. stock expires. The price of Delta stock will be either $60 or $40 on that date. Today, Delta stock trades for $55. The strike price of the call is $50. The continuously compounded risk - free rate is 9%. a. What is the tracking portfolio (\Delta and b)? b. How much are you willing to pay for the call option?arrow_forwardConsider a European Call Option with a strike of 82. The current price of the underlying asset is 80, and the time to expiry is 5 months. The current market price of the option is 6.22. The risk-free rate is 4.1%. (b) You believe the true volatility is 28.4%. Is the option under-priced or overpriced? Hence what position should you take in option to make money. Explain. (Please provide Screenshots.)arrow_forward
- . A European put option written on a non-dividend paying stock that is currently worth ₺100 in the stockmarket has a strike price of ₺100 and exactly five months left until its expiration date. If the continuouslycompounded annual risk-free rate is observed as 20% per year across all maturities and the put option iscurrently priced at ₺3.20 in the option market, what should be the theoretical price of a European call optionwritten on the same stock that has the same strike price and expiration date as the put option described?arrow_forwardThe British pound (£) is currently worth 1.45 euros (€). This can either increase by u = 1.1 or decrease by d = 0.9 over each 4 months. Consider a European call option with a strike price of K = 1€ per £ and time-to-maturity T = 8 months. The continuously compounded risk-free rate in Britain is 4% per annum and in Europe is 10% per annum. What is the price of the European call option today? Please explain your answer using your own words and show your workings. In addition, if the option was American-style would the risk-neutral probability of an up-move be smaller than, equal to or greater than the one you have calculated? Explain why using your own words.arrow_forwardThe British pound (£) is currently worth 1.45 euros (€). This can either increase by u = 1.1 or decrease by d = 0.9 over each 4 months. Consider a European call option with a strike price of K = 1€ per £ and time-to-maturity T = 8 months. The continuously compounded risk-free rate in Britain is 4% per annum and in Europe is 10% per annum. What is the price of the European call option today? Please explain your answer using your own words and show your workings. In addition, if the option was American-style would the risk-neutral probability of an up-move be smaller than, equal to or greater than the one you have calculated?arrow_forward
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