ull T-Mobile 2:11 AM 26%) International Finance (FIN 178) Final Homework Assignm
ID: 2794085 • Letter: U
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ull T-Mobile 2:11 AM 26%) International Finance (FIN 178) Final Homework Assignment! Due: End of Class on Tuesday, December 05 2. Lufthansa (a German company) has just signed a contract with Boeing to purchase two new 747-400's for a total of $60,000,000, due three months (90-days) from today Lufthansa wants to cover the S60,000,000 account payable by purchasing call options The current spot rate is 1.25/S The 90-day call option (to buy dollars) has a strike price of 1.25/S and a premium of 0.03/S How much will it cost Lufthansa (in euros) to buy the 90-day call options to cover the $60,000,000 account payable? a. b. If the spot rate in 90-days is 1.35/S what is the cost of the $60,000,000 in euros ()? c. If the spot rate in 90-days is 1.1S/S what is the cost of the $60,000,000 in curos (E)?Explanation / Answer
a) here strike price = 1$ = 1.25 euro means one has to pay 1.25 euro to buy one $. Premium is 1$=0.03 euro
Thus to cover $60,000,000 one need to pay as premium = $60,000,000*0.03 = 1800,000 euros
b) Suppose after 90 days price is 1$=1.35 euro means one has to pay 1.35 euro to buy 1 $ hence we will exercise call option. Thus total out flow = $60,000,000*1.25 = 75,000,000 + Premium (1800,000) = 76,800,000 euros
c) Suppose after 90 days price is 1$=1.15 euro means one has to pay 1.15 euro to buy 1 $ hence we will not exercise call option. Thus total out flow = $60,000,000*1.15 = 69,000,000 + Premium (1800,000) = 70,800,000 euros
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