What is the call option writers profit

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Reference no: EM133491147

Case: Your Australian company has just made a contract to buy heavy machinery from a German company. Your company must pay German company €300,000 in three months. You have three alternatives (any combination allowed) to hedge this FX exposure: (a) buying a call option at a strike price of A$1.45 per euro. The premium for this call option is A$0.02 per euro or (b) buying a three-month euro forward contract from a German Bank, which quotes you A$1.47 per euro or (c) buying a futures contract (assuming no transaction costs and no margin account requirements) at a price of A$1.465 per euro.

As an expert FX dealer, you expect that the euro in three months (when your payment is due to German company) would be settled at A$1.48 and to your surprise, it happened so, i.e., euro settled at A$1.48 after 3-months. What would be your company's gains or losses if you did allocate €300,000 equally to option contract and futures contract to hedge this FX exposure (show your workings)?

Question: What is the call option writer's profit (loss) if the euro in three months is settled at A$1.46 (Must show your workings)? Imagine the option writer issued the contract for the entire FX exposure (i.e., €300,000).

Reference no: EM133491147

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