Question
a)A trader sells a call option with a strike price of $45 for $7. What is the trader's maximum gain and maximum loss? b)A trader
a)A trader sells a call option with a strike price of $45 for $7. What is the trader's maximum gain and maximum loss?
b)A trader enters into a long forward contract on 100 million yen. The forward exchange rate is $0.0082 per yen. How much does the trader gain or lose in dollars if the exchange rate at the end of the contract is
i)$0.0072 per yen?
ii)$0.0093 per yen?
c)You own a put option on a Brambles share with an exercise price of $12. The option will expire in exactly six months' time.
i)If the share is trading at $9 in six months, what will be the payoff of the put?
ii)If the share is trading at $18 in six months, what will be the payoff of the put?
iii)Assuming that the option costs $0.50, draw aprofitdiagram showing the profit of the put as a function of the share price at expiration.
d)A U.S. company expects to buy 1 million Canadian dollars in six months. Explain how the exchange rate risk can be hedged using (i) a forward contract; and (ii) an option.
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