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Imagine that you are taking a trip to Sweden in ve months to hand select your brand new Volvo XC90, which will cost 550,000 kr (Swedish Krona), at a local dealership. You will pay for it when you arrive, drive it around Malmo, then it will be shipped back to your residence in the United States. You currently have US dollars in your bank account. Suppose that the spot exchange rate is 8.8kr/$, the forward rate for 5 months from now is 8.6kr/$, and there is a call option available which will expire 6 months from now with a striking price of 8.7kr/$ and a premium of 0.2 US cents per kronor.
a) What are the dierent ways you could arrange to pay for your new XC90?
b) Assume that you bought the call option described above. If the spot exchange rate 5 months from now (when you arrive in Sweden) is 8.65kr/$, then should you exercise your option or let it expire?
c) Calculate how much money you would make (or lose) if you 1) let the option expire or 2) exercise the option.
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