International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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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
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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.
Question 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?…
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- 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_forwardConsider the position of a call writer who sold a call option on Australian dollars at an exercise price of $US0.7600/$A, and a premium of $US0.002/$A. Calculate and graphically depict the profits/losses for this call option position for the following spot prices at exercise date: $US0.7475/$A, $US0.7550/$A, $US0.7600/$A, $US0.7700/$A, and $US0.7800/$A.arrow_forwardSuppose that the spot price of a Canadian dollar is U.S. $0.89 and that the exchange rate has a volatility of 7% per year. Risk-free interest rates are 6% in the U.S. and 4% in Canada. Calculate the price of a 6-month European call option to buy one Canadian dollar for U.S. $0.89. Express your answer in terms of the cumulative normal distribution function, N(x), as in the answers to question 16 in part 1. What is the price of a 6-month option to buy U.S. $0.89 for one Canadian dollar? Please show all your work! Thank you SO mucharrow_forward
- Suppose you have a 1,200,000 US dollar payable coming due in June and that the spottoday is .98 US/CDN. You get a strike of .98 US and you are dealing with the PHLX. Suppose you are deciding whether or not to hedge out the foreign exchange risk. The size of the Canadian dollar contract on the PHLX is 50,000 Canadian dollars percontract. The option price is listed as 1.00 for the June put on Canadian dollars and .90 on the June call. Suppose you expect the US/CDN to be .97 on the last day of the option (the expiry date). This also happens to be the day you need to cover your payable. How much does it cost you to set up the hedge with brokerage cost set to zero? (In CANADIAN dollars approximately.) A. 12,755 B. 12,887 C. 12,000 D. 12,500arrow_forwardA trader focuses principally on the Australian Dollar/Singapore Dollar (A$/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_forwardSuppose 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.arrow_forward
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