Calculate the total cost of the contracts

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Question - Importer will have a net cash outflow of £250,000 in payment for goods bought, the payment date is not known with certainty, but should occur in late November.

On September 16, the importer locks into a ceiling purchase price for pounds by buying eight PHLX calls on the pound (each with a face value of £31,250), with a strike price of $1.50/£ and an expiration date in December. The option premium on that date is $0.0228/£. There is a brokerage commission of $25 per option contract.

Required -

a) Calculate the total cost of the contracts.

b) What ceiling purchase price for pounds has the importer locked into?

c) If on the November payment date, the spot rate is $1.46/£, would the importer exercise the options? What is the importers dollar cost for the £250,000 payment.

Reference no: EM132937255

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