Reference no: EM132955738
A Namibia firm has an obligation to pay £500,000 in 3 months' time and has exported goods worth US$500,000, payment of which is also expected in 3 months' time. It is the end of the year, when the exchange rate between the Namibian dollar and the US dollar (NamD/USD) is 16.975 and the exchange rate between the Namibian dollar and the British pound (Nam/Pound) is 19.485. The exchange rate outlook is very blurred as it is believed that the exchange rates could move either way. The following probability distributions are available for the value of the exchange rates expected to prevail at the end of the 3-months period:
NamD/USD Probability NamD/GBP Probability
16.575 0.30 19.378 0.15
16.960 0.25 19.475 0.25
17,125 0.25 19.672 0.15
17.595 0.20 19.895 0.40
19.915 0.05
(a) What are the most likely exchange rate values for US dollar and the British pound?
(b) How much will the Namibian firm receive from its exports if the exchange rates are at the least likely values?
(c) How much will the Namibian firm pay in domestic currency for its imports if the exchange rates are at the most likely values?
(d) What is the worst expected Namibian dollar/US dollar exchange rate?
(e) What are the expected spot exchange rates for the United States dollar and the British Pound against the Namibian dollar? (4 marks)
(f) How much does the Namibian firm expect to receive from its exports?
(g) How much does the Namibian firm expect to pay for its imports?
Suppose the Namibian Firm can buy currency call and put options at a premium of N$2 per unit of foreign currency. The call option has a strike price of N$19.500 and the put option has a strike price of N$17.250.
(h) Explain whether the call option will be exercised if the future spot exchange rate of the Pound is at its expected value. How much will be the profit the option buyer?
(i) Explain whether the call option will be exercised if the future spot exchange rate of the US dollar is at its expected value. How much will be the profit the option seller?
(j) What is the probability that the call option will be exercised?
(k) What is the probability that the put option will be exercised?