Malibu, Inc., is a U.S. company that imports British goods. It plans to use call

Question

Malibu, Inc., is a U.S. company that imports British goods. It plans to use call options to hedge payables of 100,000 pounds in 90 days. Three call options are available that have an expiration date 90 days from now. Fill in the number of dollars needed to pay for the payables (including the option premium paid) for each option available under each possible scenario.

If each of the five scenarios had an equal probability of occurrence, which option would you choose? Explain.

Spot Rato of Pound Exercise Price =S1.76; Premium= $.05 Exercise Price = $1.79; Premium= $.03 3 Exercise Price 90 Days $1.74; Scenario from Now Premium= $.06 S1.65 1.70 1.75 1.80 1.85

Explanation / Answer

The payoff table is as shown below:

The expected spot price after 90 days = 0.2* 1.65 + 0.2*1.70 + 0.2*1.75 + 0.2*1.80 + 0.2*1.85 = 1.75.

Hence the best option to purchase is the thrid option of $1.79 with a premium of 0.03

Scenario Spot Excerise =1.74, prem = 0.06 Excerise =1.76, prem = 0.05 Excerise =1.79, prem = 0.03 1 1.65 -0.06 -0.05 -0.03 2 1.7 -0.06 -0.05 -0.03 3 1.75 -0.05 -0.05 -0.03 4 1.8 0.00 -0.01 -0.02 5 1.85 0.05 0.04 0.03

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