An Australian company imports goods from Germany and expects the payment of EUR 250,000 after 60 days. Therefore, the company purchased a Call option with a strike price of AUD 1.25/EUR and a premium of 5% of the option value. At the maturity of the option, the market price is AUD/EUR=0.85. Specify the decision of the Australian company. O a. To not hedge the risk O b. To purchase the amount in EUR from the market O c To exercise the option O d. To search for another option contract

An Australian company imports goods from Germany and expects the payment of EUR 250,000 after 60 days. Therefore, the company purchased a Call option with a strike price of AUD 1.25/EUR and a premium of 5% of the option value. At the maturity of the option, the market price is AUD/EUR=0.85. Specify the decision of the Australian company. O a. To not hedge the risk O b. To purchase the amount in EUR from the market O c To exercise the option O d. To search for another option contract

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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On June 1, Maxwell Corporation (a U.S.-based company) sold goods to a foreign customer at a price of 1,110,000 pesos and will receive payment in three months on September 1. On June 1, Maxwell acquired an option to sell 1,110,000 pesos in three months at a strike price of $0.076. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Relevant exchange rates and option premia for the peso are as follows: Date June 1 June 30 September 1 Maxwell must close its books and prepare its second-quarter financial statements on June 30. a-1. Assuming that Maxwell designates the foreign currency option as a cash flow hedge of a foreign currency receivable, prepare journal entries for the export sale and related hedge in U.S. dollars. a-2. What is the impact on net income over the two accounting periods? b-1. Assuming that Maxwell designates the foreign currency option as a fair value…
FÐI may involve mergers with and acquisitions of existing foreign businesses. Select one: O True O False From the perspective of the writer of a put option written on C52,500. it the strike price is $1.25/e, and the option premium is $2,625, at what exchange rate do you start to lose money? Select one: O a $1.2/c O b $1.20/€ O c. S1.30/€ O d $1.52/e
Shandra Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 107,000 pounds, with delivery and payment to be made on June 15. On April 15, when the spot rate is $1.27 per pound, Shandra purchases a two-month call option on 107,000 pounds and designates this option as a cash flow hedge of a forecasted foreign currency transaction. The time value of the option is excluded in assessing hedge effectiveness; the change in time value is recognized in net income over the life of the option. The option has a strike price of $1.27 per pound and costs $1,070. The goods are received and paid for on June 15. Shandra sells the imported goods in the local market immediately. The spot rate for pounds is $1.320 on June 15, Required: a-1. Prepare all journal entries for Shandra Corporation related to this transaction and hedge. a-2. What amount should Shandra Corporation report in net income as cost of goods sold for the quarter ending June 30? b. What amount…
Assume that Smith Corp. will need to purchase 200,000 British pounds in 90 days. A call option exists on British pounds with an exercise price of $1.68, a 90-day expiration date, and a premium of $.03. A put option exists on British pounds with an exercise price of $1.69, a 90-day expiration date, and a premium of $.03. Smith Corporation plans to purchase options to cover its future payables. It will exercise the option in 90 days (if at all). It expects the spot rate of the pound to be $1.76 in 90 days. Determine the amount of dollars it will pay for the payables, including the amount paid for the option premium. Group of answer choices $338,000 $342,000 $332,000 $344,000
An investor has purchased United States dollar call options, with an exercise price of A$1.15 anda premium of A$0.03 per unit.(a) Calculate the break-even price. (b) Calculate the profit or loss of the option for the investor if the spot rate at the time the investor considers exercising the options is : (1) A$1.10 (2) A$1.17 (3) A$1.23.(c) What is the maximum loss for the investor?(d) Explain why the investor could have an unlimited profit if the options are exercised.(e) Explain in general the similarities of and differences between a currency call option and a currency put option.
Choose all expressions that accurately complete the statement below: Writing a European call option on £10,000 at a strike price of $1.80/£ and a premium of $0.02/£: Group of answer choices Obligates the optionholder to purchase £10,000 for $18,000 USD. Will be profitable for the seller when the price of the GBP exceeds the put-call parity rate. Obligates the writer to sell £10,000 on the expiration date if the optionholder chooses to exercise. Allows the optionholder to exercise the option at any point up to the expiration date. Earns the seller a premium of $200.
For a call option of CN¥100,000 with the $0.16 exercise price and $0.0005 premium, When the spot exchange rate is $0.1602, the call option holder should __ the call? a. exercise b. not exercise
Nucor Corporation would like to use options to hedge a 18,324,000 Philippine Peso payable. Both call options and put options have the premium of $0.002 (per unit of Philippine Peso) and the exercise price $0.019 per Philippine Peso. The option will not be exercised until the expiration date, if at all. Should Nucor Corporation buy call options on Philippine Peso or buy put options on Philippine Peso? If the spot rate at the time of maturity is $0.017 per Philippine Peso, what is the total amount paid by the corporation if it acts rationally (after accounting for the premium paid)? Buy call options on phillipine peso 348,156 buy put options on phillipine peso 384,804 buy call options on phillipine peso 274,860 buy put options on phillipine peso 311,508
A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit. Firm A wants to borrow €1,000,000 for one year and B wants to borrow $2,000,000 for one year. The spot exchange rate is $2.00 = €1.00, a swap bank makes the following quotes for 1-year swaps and AAA-rated firms against USD LIBOR. USD Euro Bid Ask Bid Ask 8 % 8.1 % 6 % 6.1 % The firms external borrowing opportunities are: € borrowing $ borrowing A € 7 % $ 8 % B € 6 % $ 9 % Is there a mutually beneficial swap? Yes, Firm A swaps with the swap bank, $ at bid and € at ask. Firm B swaps with the swap bank, $ at ask and € at bid. Firms A and B would each save 90bp and the swap bank would earn 20bp. There is no mutually beneficial swap at these prices. Yes, Firm A swaps…
Sysco corporation has purchased currency call options to hedge a 4,320,000 Swedish krona payable. The premium is $0.015 (per unit of Swedish krona) and the exercise price of the option is $0.097 per Swedish krona. If the spot rate at the time of maturity is S0.105 per Swedish krona, what is the total amount paid by the corporation if it acts rationally (after accounting for the premium paid)? Question 27 options: S 419,040. $354,240. $518,400. S453,600. $483,840.
A trader in the United States has a portfolio of derivatives on the Australian dollar with a delta of 456. The USD and AUD risk free interest rates are 5% and 8%. What position in a one-year forward contract on the Australian dollar creates a delta-neutral position? Question options: Long 494.0 Short 494.0 Short 394.0 None of the above
On June 1, Maxwell Corporation (a U.S.-based company) sold goods to a foreign customer at a price of 1,170,000 pesos and will receive payment in three months on September 1. On June 1, Maxwell acquired an option to sell 1,170,000 pesos in three months at a strike price of $0.082. The time value of the option is excluded from the assessment of hedge effectiveness, and the change in time value is recognized in net income over the life of the option. Relevant exchange rates and option premia for the peso are as follows: Put Option Premium Spot Date for September 1 Rate (strike price $0.082) June 1 S 0.082 June 30 0.081 September 1 0.080 $ 0.0045 0.0032 N/A Maxwell must close its books and prepare its second-quarter financial statements on June 30. a-1. Assuming that Maxwell designates the foreign currency option as a cash flow hedge of a foreign currency receivable, prepare journal entries for the export sale and related hedge in U.S. dollars. a-2. What is the impact on net income over…

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