Create a position in the underlying asset that will hedge

Assignment Help Financial Management
Reference no: EM131515266

You have written a call option on £10,000 with a strike price of $20,000. The current exchange rate is $2.00/£1.00 and in the next period the exchange rate can increase to $4.00/£1.00 or decrease to $1.00/€1.00 (i.e. u = 2 and d = 1/u = 0. 5). The current interest rates are i$ = 3% and are i£ = 2%. Find the hedge ratio and use it to create a position in the underlying asset that will hedge your option position.

A. Buy £10,000 today at $2.00/£1.00

B. Enter into a short position in a futures contract on £6,666.67

C. Lend the present value of £6,666.67 today at i£ = 2%

D. Enter into a long position in a futures contract on £6,666.67

E. Both c and d would work

F. None of the above

Reference no: EM131515266

Questions Cloud

Legal immigrants entering the united state : Do you think it should be a requirement that legal immigrants entering the United States must learn English? Yes or No. Defend your position.
Estimate the speed in the working section : A closed-return wind tunnel with a large contraction ratio has air at standard conditions of temperature and pressure in the settling chamber upstream.
What is w for the minimum variance portfolio : What is w for the minimum variance portfolio? What are the mean and standard deviation of the minimum variance portfolio annual return?
What is the free-stream velocity : On the basis of Bernoulli's equation, discuss the assumption that the compressibility of air may be neglected for low subsonic speeds.
Create a position in the underlying asset that will hedge : Find the hedge ratio and use it to create a position in the underlying asset that will hedge your option position.
What is the pound and dollar cross rate : The bid-ask quotes for the Pound spot rate is $1.60-$1.62 and for the Canadian dollar spot rate is $0.65-$0.69. What is the Pound/C$ crossrate?
Estimate the throat diameter under the given conditions : A convergent-divergent duct has a maximum diameter of 150 mm, and a Pitot- static tube is placed in its throat. Neglecting the effect of the Pitot-static tube.
Based on internal rate of return : Based on internal rate of return of _____ percent for this project,
Stock and bonds from a variety of investment alternatives : He must select specific investments for example, stock and bonds from a variety of investment alternatives.

Reviews

Write a Review

Financial Management Questions & Answers

  Pay the mortgage according to the loan agreement

You borrow 230,000 to buy a house. The mortgage rate is 4.5 percent and the loan period is 25 years. Payments are made monthly. If you pay the mortgage according to the loan agreement, how much total interest will you pay?

  Decreasing the interest rate

All else equal, the future value of a lump-sum amount invested today will increase if this happens Decreasing the interest rate, Decreasing the amount of the lump sum investment

  Create new budget for the next fiscal year

Using the existing budget, create a new budget for the next fiscal year. Set out the details of all assumptions you needed in order to build this budget.

  Approximate after-tax cost of debt for a new issue of bonds

The coupon rate on an issue of debt is 8%. The yield to maturity on this issue is 10%. The corporate tax rate is 31%. What would be the approximate after-tax cost of debt for a new issue of bonds?

  Management and financial assistance to small businesses

Why does the SBA concentrate on providing management and financial assistance to small businesses?

  Constructing a two stock portfolio based on the information

You are constructing a two stock portfolio based on the information provided below. What dollar amount will you invest in each stock to achieve the desired return goal? Stock X Stock Y Expected Return 14.0% 9.0% Goal Return of Portfolio: 10.00% Dolla..

  Importance of external financial reporting to third parties

Discuss the importance of external financial reporting to third parties

  How much is your organization losing per year

Your organization sees 100,000 patients in its emergency room (ER). The rate of patients that leave your ER without being seen (LWBS) is 4%. Data shows that 20% of patients seen are usually admitted. The financial input per 1 admitted patient is $10,..

  What is the expected bond value

Consider a $1,000 par value bond with a 7% annual coupon. The bond pays interest annually. There are 20 years remaining until maturity. You have expectations that in 5 years the YTM on a 15-year bond with similar risk will be 7.5%. What is the expect..

  Calculate the times interest earned ratio

Calculate the times interest earned ratio for Tierre's Ts, Inc. using the following information. Sales = $200,000, cost of goods sold = $50,000, depreciation expense = $13,000, addition to retained earnings = $70,000, dividends per share = $0.50, tax..

  Based on reinvesting the prepaid mortgage amount

In 2010 a mortgage loan of $8,500,000 was issued by Associated Bank on a downtown office building. The terms of the loan were 10 years, 6.15% interest rate, interest only (no amortization). The borrower has a buyer for the property and would like to ..

  Higher standard deviation than stock

Please shortly explain how they arrived at the answers below? Stock A has a beta of 1.5, and stock B has a beta of 1.0. Determine whether each of the statements below is true or false. Stock A must have a higher standard deviation than Stock B. Stock..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd