Question
Q 12: Assume that Smith Corporation will need to purchase 200,000 euros in 90 days. A call option exists on Euro with an exercise price
Q 12: Assume that Smith Corporation will need to purchase 200,000 euros in 90 days. A call option exists on Euro with an exercise price of $1.68 (i.e., 1.68 USD per EUR), a 90-day expiration date, and a premium of $.03 (i.e., 0.03 USD per EUR). A put option exists on Euro, with an exercise price of $1.67 (i.e., 1.67 USD per EUR), a 90-day expiration date, and a premium of $.02 (i.e., 0.02 USD per EUR). Smith Corporation plans to purchase options to cover its future payables. It will exercise the option in 90 days (if at all). It expects the spot rate of the Euro to be $1.72 (i.e., 1.72 USD per EUR) in 90 days. Determine the number of dollars it will pay for the payables, including the amount paid for the option premium. Assume (for the purposes of this calculation) that the spot rate does indeed turn out to be $1.72 (i.e., 1.72 USD per EUR) and ignore the time value money for the option premium.
a) $335,000 b) $336,000 c) $338,000 d) $342,000 e) $350,000 f) Only Oliver the Finance Pug knows.
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