Explain the exchange rate risk

Assignment Help Finance Basics
Reference no: EM133062586

a) Suppose that a March call option on a stock with an exercise price of $45 costs $2 and is held until March.

i) Under what circumstances will the buyer of the option make a gain (profit)?

ii) Under what circumstances will the option be exercised?

b) An investor sells a call option with a strike price of $30 for $3. What is the investor's maximum gain and maximum loss?

c) An investor enters into a short forward contract to buy 100,000 British pounds for U.S dollar at an exchange rate of 1.4000 U.S dollars per pound. How much does the investor gain or lose if the exchange rate at the end of the contract is

i) $1.3800 U.S dollars per pound

ii) $1,4300 U.S dollars per pound

d) You own a put option on a Brambles share with an exercise price of $13. The option costs $1. The option will expire in exactly six months' time. Draw a profit diagram showing the profit of the put as a function of the share price at expiration.

e) A U.S. company expects to receive 1 million Canadian dollars in six months. Explain how the exchange rate risk can be hedged using (i) a forward contract; and (ii) an option.

Reference no: EM133062586

Questions Cloud

What is susan incremental profit : Attend college part-time at a cost of $500 and work part-time earning $1,800. What is Susan's incremental profit if she chooses option 3 over option 2
What is the current price of share : Moriarty Co Ltd has been growing at a rate of 3.5% for the past 4 years, and the company's CEO expects the company to continue to grow at this rate for the next
What is the maximum price : a. A new financial product will give you a monthly return of 0.03% if you invest $200 per month for ten consecutive years. How much will you have after ten year
By how much their profit increases or decreases : Stellar Company has the following sales, variable cost, and fixed cost. If sales increase by $10,000 then their profit increases/decreases by how much
Explain the exchange rate risk : a) Suppose that a March call option on a stock with an exercise price of $45 costs $2 and is held until March.
What is Bellfont production cost per door stopper : Bellfont expects to produce 100,000 door stoppers. Assuming no structural changes, what is Bellfont's production cost per door stopper for September
Estimated value per share of boehm stock : Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year (i.e. Dj = $1.50). The dividend is expected to grow at a constant rate
Draw scattergraph relating labor costs to number of visitors : The company has collected the following data on labor costs and number of visitors to the park over the last 30 months. Draw a scattergraph relating labor costs
Calculate the new wacc of fold : Required: Calculate the new WACC of Fold's using the cost of new debt and preferred equity. The capital structure for Fold's will be 40% debt, 10% preferred equ

Reviews

Write a Review

Finance Basics Questions & Answers

  Financial reporting and analysis

Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..

  A report on financial accounting

This report is specific for a core understanding for Financial Accounting and its relevant factors.

  Describe the types of financial ratios

Describe the types of financial ratios and other financial performance measures that are used during venture's successful life cycle.

  Differences between sole proprietorship and corporation

Briefly describe the major differences between a sole proprietorship and a corporation

  Prepare a cash budget statement

Calculate the expected value of the apartment in 20 years' time. What is the mortgage loan repayment at the beginning of each month

  What are the implied interest rates

What are the implied interest rates in Europe and the U.S.?

  State pricing theory and no-arbitrage pricing theory

State pricing theory and no-arbitrage pricing theory

  Small business administration

Identify the likely stage for each venture and describe the type of financing each venture is likely to be seeking and identify potential sources for that financing.

  Effect of financial leverage

The Effect of Financial Leverage and working capital management

  Evaluate the basis for the payment to the lender

Evaluate the basis for the payment to the lender and basis for the payment to the company-counterparty.

  Importance of opps, ipps, mpfs and dmepos

Research and discuss the differences and importance of : OPPS, IPPS, MPFS and DMEPOS.

  Time value of money

Time Value of Money project

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