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1. A speculator is considering the purchase of two three-month British pound call options with a striking price of $1.56 per £. The premium is $0.03 per pound. The standard size of each option contract is 10,000 pounds.
(a) Determine the future spot price at which the speculator will only break even.
(b) What would be the speculator’s profit if the pound depreciates to $1.54 per £?
(Please include currency symbols $, £ in your answer)
2. Microsoft would like to borrow pounds, and Boots wants to borrow dollars. Because Microsoft is better known in the United States, it can borrow on dollars at 5.5% and pounds at 7%, whereas Boots can on its own borrow dollars at 6% and pounds at 6.5%. Suppose Microsoft wants to borrow £1 million for two years, Boots wants to borrow $1.6 million for two years, and the current ($/£) exchange rate is $1.60/£. What swap transaction would accomplish this objective? Assume the counterparties would exchange principal and interest payments with no rate adjustments.
The stock just paid a dividend of $0.8. How much are you willing to pay for this stock today if you expect the dividends to grow at a constant annual rate of 2%
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Westbrook Equipment Company posted sales of $843,800 and costs of $609,900 for 2012. The firm paid $38,200 in interest and $12,000 in dividends. It also increased retained earnings by $61,763 for the year. The depreciation was $76,400. What is the av..
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You are investigating the feasibility of installing a solar system at your house. You are thinking of installing 20 panels.
What would you expect and prepare for each of the businesses in terms of the financial leverage?
Calculate the value of the call option. Next, use the put-call parity to determine the value of a Temex put option that also has a $45 strike price and six months until expiration.
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