A typical pricing schedule for the US$/ currency option on the Philadelphia exchange is as follows.

Strike Price

Calls

Puts

Jun.

Sept.

Dec.

Jun.

Sept.

Dec.

111.00

1.99

2.25

2.47

0.64

1.32

2.12

112.00

1.39

2.03

2.28

1.00

1.56

113.00

0.87

1.55

1.81

1.43

2.22

• The options are for a contract size of 125,000 and prices (both strike price and premia) are quoted in US$ (cents) per .
• The decision as to which exercise price to choose will depend on cost, risk exposure and expectations. If you consider the cost implications only (for calculation purposes) the best exercise price is then the one which (incorporating the premium cost) is most financially advantageous.

Using the above schedule, determine whichSeptember call optionwould give the lowest net cost ofacquiring euros.

b.Using the above schedule, determine whichJune put optionwould give the highest net receipt fromselling euros.

c.Set up the hedge by addressing four key questions:

• Do we need call or put options?
• How many contracts?
• Which expiry date should be chosen?
• Which strike price / exercise price should be used?