You are US company, 500,000 BP (British Pound) payable to UK in one year. Answer
ID: 2597336 • Letter: Y
Question
You are US company, 500,000 BP (British Pound) payable to UK in one year. Answer in terms of US$. Information for Forward Contract: Forward exchange rate (one yr): 1.54 $/BP Information for Money Market Instruments (MMI): Current exchange rate: 1.50 $/BP Investment return at Aerion Fund Management (in UK): 4% annual Interest rate of borrowing from Bank of America (in USA): 2% annual Information you need for Currency Options Contract: Options premium: 0.015 $/BP Interest rate of borrowing from Bank of America (USA): 2% annual Allowed to exercise options at 1.54 $/BP How much would you pay to Bank of America ONE YEAR from now in order to sign the Currency Options Contract? About $6540 About $7702 About $7850 $7882 None of the above
Explanation / Answer
None of the above
Premium to be paid today for option = 0.015 $/BP * 500000 BP
= $ 7500
So we borrow 7500 from bank of America to pay for options.
Amount to be paid one year from today to bank of America
= $ 7500 + 2% interest on 7500
I.e. 7500 +7500*2/100
=$ 7650
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.