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Determine break-even price for the option

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Reference no: EM132796039

Assume the current spot rate is $1.1201/€, and U.S. Dollar ($) is the home currency. A PUT option on Euro (€) has a strike price of $1.0640/€ and a premium of $0.00038/€. Assume a U.S. company will purchase the option for hedging a cash flow amounting to €1m Account Receivable due in 3 months. The weighted avaerage cost of capital (WACC) of the purchaser is 15% p.a.

i. Determine break-even price for the option.

ii. For a buyer, when the spot rate is $1.1740/€, is the option at-the-money, or in-the-money, or out-of-the-money?

iii. Determine net profit for the option if the spot rate is $1.0000/€.

iv. Assume 3 months forward rate is $1.0204/€. Is the forward market hedge or the option market hedge a better choice for the company? Show relevant calculations.

Reference no: EM132796039

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