Your company has purchased currency call option to hedge a 70,000 British pounds

Question

Your company has purchased currency call option to hedge a 70,000 British pounds payable. The premium is $0.02 and exercise price of the option is $0.50. If the spot rate at the time of maturity is $0.85, what is the total amount paid by your corporation. Including the premium, if it acts rationally?( assume option contract specifies 70,000 units of BP)
Please show steps Your company has purchased currency call option to hedge a 70,000 British pounds payable. The premium is $0.02 and exercise price of the option is $0.50. If the spot rate at the time of maturity is $0.85, what is the total amount paid by your corporation. Including the premium, if it acts rationally?( assume option contract specifies 70,000 units of BP)
Please show steps
Please show steps

Explanation / Answer

A call Option is In-The-Money when the strike price is lower than the market price.

Spot rate = $0.85

Strike price = 0.50

Call premium = $0.02

Since spot rate is greater than strike price so the option must be exercised.

So total amount payable for 70,000 GBP is calculated below:

Total amount payable = GBP 70,000 / ($0.50 + $0.02)

                                    = GBP 70,000 × $0.52

                                     = $36,400

Total amount payable in term of dollar is $36,400

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