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Amazone will make a payment totaling 5 million next month to German suppliers. It can buy euro call options with a strike price of $1.22
Amazone will make a payment totaling 5 million next month to German suppliers. It can buy euro call options with a strike price of $1.22 at a premium of 2.0 cents per euro. The spot price of the euro is currently $1.25, and the euro is expected to trade in the range of $1.18 to $1.30. Amazone also can take a long position in the euro futures contract with futures price at $1.27.
- How many options and futures contracts will Amazone need to protect its payment? Each contract size is 62,500 for options and 125,000 for futures and calculate the breakeven points
- Diagram Amazone's profit and loss associated with the call option position and futures
position within its range of expected exchange rates. Ignore transaction costs and margins.
- Calculate what Amazone would gain or lose on the option and the future within the range of expected future exchange rates at three points: $1.20, $1.23 & $1.28.
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