What option strategy places floor on your currency revenue

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Reference no: EM13897522

1. Suppose that you have a foreign currency receivable (payable). What option strategy places a floor (ceiling) on your domestic currency revenue (cost)?

2. Describe qualitatively how changing the strike price of the option provides either more or less expensive insurance.

3. Why does an increase in the strike price of an op- tion decrease the value of a call option and increase the value of a put option?

4. Why does an increase in the volatility of foreign ex- change rates increase the value of foreign currency options?

5. How does increasing time to maturity affect foreign currency option value?

6. What is the payoff on an average-rate pound call option against the dollar?

7. Suppose the current spot rate is $1.29 >:. What is your payoff if you purchase a down-and-in put option on the euro with a strike price of $1.31 >:, a barrier of $1.25 >:, and a maturity of 2 months? When would someone want to do this?

Reference no: EM13897522

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