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Ch 10 In-Class Assigment-Wock 2-FX Options You work as CFO for a company that today secured an 800,000 (GBP) order, for which the client will pay you in two months You're about recent volatility in the British Pound, and given that this order involves a narrow profit margin, you'd like to investigate hedging this A/R 1) How many USD can you expect to collect in 60 days if the exchange rate doesn't change? 2) What's your profit margin, if the goods cost $1,000,000 USD to produce and ship? The spot rate today is GBP/USD 1.27 if you hedge using a currency option, please describe what type of option you would choose and how you would construct thits Given the following, please salsulats the sest (in USD) of hedging the above sale with a currency option: Annualized option premium: 3.25% Spot rate: GBP/USD 1.27 .A/R amount: 800,000 .A/R Maturity: 60 days Strike price: 1.27 I GBPUSD moves to 1.40, what's your net USD collested considering both the A/R and the option together? How much do you save, relative to remaining unhedged, if GBP/USD moves to 1.137 (Including the cost of the premium For the remaining questions, please log on to your Interactive Brokers account Part I. Implementing an Options Hedge in Practice Raw currency options, such as those in the textbook, are available over-the-counter only. Those that are traded on exchanges are actually currency options on currency futures. We can use these types of options to hedge our accounts receivable currency exposure on the front page of this assignment. Q) In how many months will your A/R mature? 1) Therefore, pick a option-futures maturity that will expire ORDER ENTRY at approximately that same time a. Type 'GBP into the Order Entry box, press enter. b. Select the appropriate maturity for GBP/USD 6.89 6.90 futures pca) C Do you need a call or a put? How do you know? Given your choice about a call or a put, select a strike price that is at-the-momey. (as close as possible). (ewrite here) 2) a. (Check current spot rates at hetpww b. Q) While doing this, please write down the multiplier c. O) Is it possible to verify in this box that this option will expire near the time that the accounts receivable matures? (Circle One) No I Don't Know d. Click 'O% to move to the next step 3) Now in the order entry sereen, click Buy', and type in a limit price somewhere in between the most recent ask. With options on futures, one option gets exposure to just one future funlike equity oprions, which carry exposure to 100 sharex), Therefore, Hint: The multiple value is in terms of USD Consider A/R value in USD at spot rate, then divide that by the futures multiple. Go ahead and enter that number for the quantity size (QTY) in the order box, and click SUBMIT What's the total cost (premium) of this option in total USD? What is that, annualized, as a percentage of the Accounts Receivable? Check the box that says Performance Profile', and look what comes up on the right. Using the graph that shows up on the right, can you verify that as the British Pound weakens, your option will make enough money to offset that? 24,900 USo 9.52 USD Equity with Loan 1.003,06 Intial Margin 0 1,003,076 21,58521,585 0 17,2617,268 This is a current projection and is subject to change Performance Profile ce Margin o 1 Override and TransmitDove e price that is at-the-money. (as close as possible). omberg.com/markets/currencies, or within TwS) multiplier s option will expire near the time that the accounts receivable write here) Contracts: British pound 175 Underlying Exchange Last Trading Day 20190208 Multiplier 62500 GOP Strike 1.255 Trading Class GBU GLOBEX Currency USD Contract Month 201902 19 195 205 21 215 Cal Put 225 23 235 24 245 265 27 275 in a limit price somewhere in between the most recent bid and ust one future.(unlike equity options, which carry exposure to 100 w many options should you buy to hedge your pound accounts e in USD at spot rate, then divide that by the futures multiple. that, annualized, as a percentage of the Accounts Receivable? he box that says 'Performance Profile', and look what comes up on the right. Using the graph that sho verify that as the British Pound weakens, your option will make enough money to offset that? Margin Impact (in USD) Amount Amount Commission (est.) Total Current Change Post-trade 0 1,003,076 0 21,585 21,585 0 17,268 17,268 16 This is a current projection and is subject to change. 24,900 USD 39.52 USD Equity with Loan 1,003,076 Initial Margin Maintenance Margin Position Performance Profile 0 16 Override and Transmit Close BUY LMT 18:00 F