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Question - As the Finance Officer of a fortune 500 company, your company in January 2021 imported goods from the UK at a value of £500,000. The payment date for the goods is deferred to November 2021. To manage your exchange risk, you have decided to buy call options on the Philadelphia exchange (each PHLX calls has a face value of £31,250). The prevailing call strike price is $1.25/£ with an expiration date in December. The option premium on that date is $0.0139/£. There is a brokerage commission of $30 per option contract.
Required -
a) How much will it cost to secure this contract?
b) Calculate the effective ceiling purchase price in the UK pound sterling and the US dollar?
c) If in November the spot rate is $1.30/£, would you exercise the options? What will be the dollar cost for the £500,000 payment?
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