International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Transcribed Image Text:Suppose that Mullen Co, a U.S.-based MNC, knows that it will need 200,000 pounds in one year in order to purchase supplies. It is considering a
currency call option to hedge this payable. Currency call options on the pound with expiration dates in one year currently have an exercise price of
$1.21 and a premium of $0.02.
Mullen Co. wishes to use its own forecast of what the spot rate might be for the pound one year from now.
• $1.18, with 30.00% probability
•
• $1.22, with 60.00% probability
•
$1.24, with 10.00% probability
For each scenario in the following table, fill in the dollar amount paid per unit for the call options (5th column), the total dollar amount paid for
200,000 pounds when using the call options (6th column), and whether Mullen would exercise the options (7th column)
Pound Spot
Rate in 1
Scenario
Year
Option
Premium
Per Unit Cost
of Owning
Option
Total Cost of Owning
Options, With Premium
Dollar Amount Paid for 200,000
Pounds when Owning Call
Options
Exercise
Options?
1
$1.18
$0.02
$1.18
$
$
2
$1.22
$0.02
$1.21
$
No
3
$1.24
$0.02
$1.21
$
$
Yes
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