Suppose that Mullen Co, a U.S. based MNC, knows that it will need 200,000 pounds in...
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Suppose that Mullen Co, a U.S. based MNC, knows that it will need 200,000 pounds in one year in order to purchase supplies. It is considering a forward call option to hedge these payables. Currency call options on the pound with expiration dates in one year currently have an exercise price of $1.20 and a premium of $0.03. Mullen Co. wishes to use its own forecast of what the spot rate might be for the pound one year from now. The company believes there are three possible outcomes for the spot rate for the pound in one year. These three scenarios are shown in the following table: Scenario Probability Pound Spot Rate in 1 Year Option Premium Total Price Per Unit, with Premium Total Price Paid for 200,000 Pounds Exercise Options? 1 1 25.00% $1.16 2 50.00% $1.22 $0.03 $0.03 $1.19 $1.23 $238,000 no $246,000 yes 3 25.00% $1.24 $0.03 $1.23 $246,000 yes 1 Given the information in the table, the expected value of dollar cash outflows when hedging payables with currency call options is for all 200,000 pounds. S Suppose that Mullen Co, a U.S. based MNC, knows that it will need 200,000 pounds in one year in order to purchase supplies. It is considering a forward call option to hedge these payables. Currency call options on the pound with expiration dates in one year currently have an exercise price of $1.20 and a premium of $0.03. Mullen Co. wishes to use its own forecast of what the spot rate might be for the pound one year from now. The company believes there are three possible outcomes for the spot rate for the pound in one year. These three scenarios are shown in the following table: Scenario Probability Pound Spot Rate in 1 Year Option Premium Total Price Per Unit, with Premium Total Price Paid for 200,000 Pounds Exercise Options? 1 1 25.00% $1.16 2 50.00% $1.22 $0.03 $0.03 $1.19 $1.23 $238,000 no $246,000 yes 3 25.00% $1.24 $0.03 $1.23 $246,000 yes 1 Given the information in the table, the expected value of dollar cash outflows when hedging payables with currency call options is for all 200,000 pounds. S
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