International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
error_outline
This textbook solution is under construction.
Students have asked these similar questions
Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts) are available on the Philadelphia exchange in units of €10,000 with strike prices of $1.60/€1.00.Options (calls and puts) are available on the Philadelphia exchange in units of £10,000 with strike prices of $2.00/£1.00. For a U.S. firm to hedge a €100,000 receivable,
Multiple Choice
buy 10 put options on the pound with a strike in dollars.
buy 10 call options on the euro with a strike in dollars.
sell 8 put options on the pound with a strike in dollars.
sell 10 call options on the euro with a strike in dollars.
Suppose you have a 1,200,000 US dollar payable coming due in June and that the spottoday is .98 US/CDN. You get a strike of .98 US and you are dealing with the PHLX. Suppose you are deciding whether or not to hedge out the foreign exchange risk. The size of the Canadian dollar contract on the PHLX is 50,000 Canadian dollars percontract. The option price is listed as 1.00 for the June put on Canadian dollars and .90 on the June call. Suppose you expect the US/CDN to be .97 on the last day of the option (the expiry date). This also happens to be the day you need to cover your payable. How much does it cost you to set up the hedge with brokerage cost set to zero? (In CANADIAN dollars approximately.)
A. 12,755
B. 12,887
C. 12,000
D. 12,500
On the basis of the following information, calculate the price of a call option on the Australian dollar:
Spot exchange rate (USD/AUD) 0.75
Exercise exchange rate (USD/AUD) 0.70
Interest rate on the US dollar (per cent per annum 8
Interest rate on the Australian dollar (per cent per annum) 10
Time to expiry 90
Standard deviation (per cent) 10
Note:-
Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism.
Answer completely.
You will get up vote for sure.
Knowledge Booster
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
- A call option on Canadian dollar has a strike (exercise) price of $0.75 per CAD. The present CAD exchange rate is $0.77 per CAD. This CAD call option has an intrinsic value of: A) Positive $0.02 per CAD. B) Zero intrinsic value. C) Negative $0.02 per CAD. D) Positive $0.75 per CAD.arrow_forwardAssume that the Japanese yen is trading at a spot price of 92.04 cents per 100 yen. Further assume that the premium of an American call (put) option with a strike price of 93 is 2.10 (2.20) cents. Calculate the intrinsic value and the time value of the call and put options.arrow_forwardQuestion 1 Consider the option on currency HKD against the USD: Current spot rate is HKD7.50 for 1 USD:· Risk-free HKD rate of interest is 5% p.a.· Risk-free USD rate of interest is 2% p.a.· Volatility (σ) of the currency returns is 20% p.a.· Maturity of the option is 3 months.· Strike rate of the option is HKD8.00 for 1 USD· The currency options are European in nature (a) Draw the terminal payoff diagram for the holder of the currency call option on HKD. (b) Draw the terminal payoff diagram for the holder of the currency put option on USD. (c) How much does it cost to hold (i.e., buy) a call-HKD option? Use the Garman Kohlhagen model. (d) What is the minimum terminal exchange rate for the holder of the call-HKD option to profit fromholding the currency option?…arrow_forward
- Consider a one period binomial model of a currency option on the dollar. Thecurrent (date t = 0) spot exchange rate is S0 = 75 pence per dollar. The spot rateat the end of the period will be either Su = 100 pence or Sd = 60 pence. The UKrisk-free interest rate over the period is rs = 1/3 (33.3333%) and the US risk-freerate of interest is rd = 1/4 (25%). There is a call option with a strike price ofK = 68 pence and a forward contract with a price of F = 80 pence. Show how touse the forward contract and the UK money market to replicate the payoffs to thecall option and hence, find the price of the call option.arrow_forwardA trader focuses principally on the Australian Dollar/Singapore Dollar (A$/S$) cross-rate. The current spot rate is S$0.9/A$. The trader expects after 2 months the cross rate will be S$0.79/A$. The trader plans to purchase an option, and has the following choices: A CALL option on S$ has a strike price of S$0.85/A$ and a premium of A$0.00037/S$. A PUT option on S$ has a strike price of S$0.85/A$ and a premium of A$0.00048/S$. i. Determine if the trader should buy a PUT option or a CALL option on S$. ii. If the trader buys the option decided in (i), determine net profit for the trader if the spot rate after 2 months is as the trader expects. iii. If the spot rate after 2 months is not what the trader expected and is S$0.61/A$, will the option the trader buys be at-the-money, or in-the-money, or out-of-the-money? [[Notably, the trader is purchasing option on S$ -- meaning S$ is the foreign currency in this instance]]arrow_forward1. The spot market quotes the exchange rate of the GHS to a CADS as GHS 3.562 while the 90-day forward quotes it at GH3.425. Required: Calculate the annualized forward premium or discount. 2. Suppose bid price for £=GHS6.27, ask price = GHS6.316. Required: Calculate the bid/ask spread.arrow_forward
- UCD (U.S. based MNC) will receive 250,000 euros in one year. The spot exchange rate today is $1.20 per euro. It observes that1. The one-year interest rate for euros is 8%, and the one-year interest rate for U.S. dollars is 3%.2. In the option market, there is one-year call option or put option available. Both options have the same exercise price of $1.18 per euro, and a premium of $0.02 per euro.3. In the forward market, the one-year forward rate exhibits a 5% discount from the current spot exchange rate. How should UCD utilize the forward market to hedge the exchange rate risk for its future receivables? And what shall be the amount received based on this hedging strategy? (Note: UCD can only buy or sell the forward contract at the forward rate available in the forward market described in bullet 3.)arrow_forwardStudy this Case and Answer Question Asked Below: On 19 April Following are the Spot Rates Spot EUR/USD 1.2000 USD/INR 44.8000 Following are the quotes for European Type Options Currency Pair Call/Put Strike Price Premium Expiry Date EUR/USD Call 1.2000 $0.035 July 19 EUR/USD Put 1.2000 $0.04 July 19 USD/INR Call 44.8000 Rs.0.12 Sep 19 USD/INR Put 44.8000 Rs.0.04 Sep 19 A Dealer believes that the spot rate for the Dollar will rise to INR 45.00 by September 19. So he decides to buy at the money call options. If his expectations are correct, his profit from BUYING call options FOR USD1.5 Million will be INR______. a. 110,000 b. 100,000 c. 120,000 d. 80,000arrow_forwardConsider the following futures contract for the currency of Brazil, Brazilian real (BRL). Contract volume: 100,000 Brazilian reals Initial margin: $1000 Maintenance margin: $800 Day Settle price ($/BRL) 1 0.19 2 0.189 3 0.186 4 0.187 (a) What’s an example of a hedger who might use this contract? (b) Assuming the USD has neither appreciated nor depreciated, has the Brazilian real appreciated or depreciated between days 1 and 4?arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
Foreign Exchange Risks; Author: Kaplan UK;https://www.youtube.com/watch?v=ne1dYl3WifM;License: Standard Youtube License