FIN 417- Assignment #2

FIN 417- Assignment #2 - Nicholas Connolly FIN 417-...

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Nicholas Connolly FIN 417- Assignment #2 10/24/2011 1. From the perspective of the writer of a put option written on €62,500. If the strike price is $1.25/€, and the option premium is $1,875, at what exchange rate do you start to lose money? 1.22 2 XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the one year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen. Assume that the forward rate is the best predictor of the future spot rate. The future dollar cost of meeting this obligation using the option hedge is: 3 Suppose a US-based firm has a receivable position for CD 10 million. In order to hedge its exchange rate exposure, would the firm use a call or a put on the CD? Would the firm buy or sell the option? Put on the CD, Buy the option 4. Find the value of a six-month call option on the spot British pound with an exercise price of $1.50 = £1 where the current value of a pound is $1.60, the interest rate available in the U.S. is r $ = 5%, the interest rate in the U.K. is r £ = 7%., the option maturity is 6 months and the volatility of the $/£ exchange rate is 30% p.a. $1.5616
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FIN 417- Assignment #2 - Nicholas Connolly FIN 417-...

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