a)You are planning to go to England in 3 months time to inspect and report upon a new agricultural discovery. You expect to be billed for a total of GBP20,000 for meals, accommodation and fares during your stay.

You note that today the spot exchange rate is AUD1.6000/GBP and the 3 months forward rate is AUD1.6500/GBP. Today, this forward rate is also your expected spot exchange rate in 3 months time. Today, you can also buy a 3 months call option on the GBP with an exercise price of AUD1.6800/GBP for a premium of AUD0.06 per GBP. The 3 month interest rate is 4 per cent per annum in Australia and 2.4% per annum in England.

REQUIRED:

(i)Calculate your expected AUD cost of buying GBP20,000 if you choose to hedge by a call option on the GBP.[2 Marks.]

Give your answer to the nearest dollar.

$Answer

(ii)Calculate the future AUD cost of meeting this GBP obligation if you decide to hedge using a forward contract.[2 Marks.]

Give your answer to the nearest dollar.

$Answer

(iii)At what future spot exchange rate would you be indifferent between the forward and the call option market hedges?[2 Marks.]

Give your answer to 4 decimal places.

Answer

AUD/GBP

(b)The CAD is trading at a spot price of AUD1.7200/CAD. Further, assume that the premium of an American call option with an exercise price of AUD1.7000/CAD is 2.50 Australian cents and of an American put option with an exercise price of AUD1.6600/CAD is 2.70 Australian cents.

REQUIRED:

(i)Calculate the intrinsic values of the call and put options.[1 + 1 = 2 Marks.]

Give your answer in cents. For example, 1.23 means 1.23c, or $0.0123.

PUT:Answer

cents

CALL:Answer

cents

(ii) Calculate the time value of the call and put options.[1 + 1 = 2 Marks.]

Give your answer in cents. For example, 1.23 means 1.23c, or $0.0123.

PUT:Answer

cents

CALL:Answer

cents