PLEASE SHOW WORK 1. Coke needs around GBP 100,000 in 60 days. It decides to buy
ID: 2653580 • Letter: P
Question
PLEASE SHOW WORK
1. Coke needs around GBP 100,000 in 60 days. It decides to buy 3 call options (93,750 units) for $0.05/unit with an exercise price of 1.50 USD/GBP. In 60 days the actual exchange rate is 1.75 USD/GBP. Should Coke exercise the option, and what is the potential net profit or loss?
2. In the previous example, what would be the net value of the call option if the GBP is 1.25 USD/GBP in the future?
3. You buy an American put option on GBP 31,250 with a cost of $0.04/unit and an exercise price of 1.50 USD/GBP. What is your net position of the put option if the actual market price of the GBP is 1.25 USD/GBP?
4. You write (sell) a call option on EUR 62,500 with an exercise price of 1.40 USD/EUR, at a premium of $0.02. The buyer of the option decides to exercise the option when the current exchange rate is 1.45 USD/EUR. What is the writer’s (seller’s) net profit or loss?
5. IBM requires EUR 10,000,000 to pay for imported computer supplies in 6 months. They engage in a forward contract with Citibank at a forward rate of 1.65USD/EUR. Six months later the actual spot rate is 1.62USD/EUR. Did IBM save or lose from this deal?
6. Joe Gamble believes that the Swiss franc is going to appreciate against the dollar. He speculates by purchasing one futures contract with a price of 0.69 USD/CHF in 3 months. The current spot rate is 0.65 USD/CHF, and the actual spot rate in 3 months is 0.75 USD/CHF. Did Joe make the right decision?
7. Merck will receive GBP 500,000 in 9 months from their London subsidiary. Since they will repatriate the funds to the U.S., they engage in a forward contract with BankAmerica to sell pounds at the forward rate of 1.55 USD/GBP. In 9 months the actual spot rate is 1.60 USD/GBP. Determine Merck’s net gain or loss?
Explanation / Answer
1. 3 call options mean 93,750 *3 = 281250 units. Hence, total option cost = 281250*0.05= 14062.5 $
As he will be needing GBP in future, he will be worrying about appreciation of GBP against dollar. Hence, he will exercise call option to reduce the effect of rising GBP.
The gain from exercising option = ( 1.75- 1,60 ) * 281250 = 42187.5
Net profit = 42187.5 - 14062.5 = 28125 $
2. If GBP is 1.25 USD/GBP in future, then value of option is = ( 1.25-1.50 ) *281250 = -70312.5 $
3. At current market price of 1.25USD/GBP, the value of put option = (1.5-1.25 ) *31250 = 7812.5 USD
4. Call premium = 0.02 * 62500 = 1250 $
On exercise of option the loss of writer is = (1.45-1.40 ) *62500 = 3125
hence, net loss = 3125- 1250= 1875
5.IBM loses on this deal because under forward contract he is buying Euro at an appreciated rate against actual spot rate six months later .
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