Due to your import of wine from France, you have an account payable in three months. You desire to hedge this account using the options market. The following info (including the table below) are available to you. Calculate the outcome of this option if you end up executing it at the end of the three months.

Today's date = March1, 2020

Spot rate on the above date = $1.1450/euro

Account payable amount = euro 48,000.00

Commercial interest rate on US dollar = 6 percent

The calls and puts premiums in the table below are in percent.

Calls Puts

Strike Price May May

($/euro)

1.135 2.25 1.34

1.140 1.98 1.57

1.160 1.10 1.84

Review the following questions. Please show work .

1 Do you buy a May call or a May put (choose call or put)

2 If you select the May strike price of $1,14 and execute this options, what would be

your outcome?

3 If you select the May strike price of $1,14, what would be your options premium cost in USD at the point of entering into the options?

4 Assuming that you execute this option, which May strike price is the best? Choose your selected strike price in dollar.

5 If at the end of the 3rd month the spot rate would be $1.12, what do you do with this option?

a. I will execute it

b. I will let it expire

c. I will be indifferent.

d. None of the answers in this group are relevant.