What is the intrinsic value of a foreign currency put option

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Reference no: EM13897527

1. What is the intrinsic value of a foreign currency call option? What is the intrinsic value of a foreign currency put option?

2. What does it mean for an American option to be "in the money"?

3. Why do American option values typically exceed their intrinsic values?

4. Suppose you go long in a foreign currency futures contract. Under what circumstances is your cumulative payoff equal to that of buying the currency forward?

5. What is basis risk?

6. Your CEO routinely approves changes in the fire in- surance policies of your firm to protect the value of its buildings and manufacturing equipment. Never- theless, he argues that the firm should not buy foreign currency options because, he says, "We don't speculate in FX markets!" How could you convince him that his positions are mutually inconsistent?

7. Why do options provide insurance against foreign exchange risks in bidding situations? Why can't you hedge with a forward contract in a bidding situation?

Reference no: EM13897527

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