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Show work and cite any sources used 1. Biogen expects to receive royalty payments totaling 1.25 million next month. It is interested in protecting these
Show work and cite any sources used 1. Biogen expects to receive royalty payments totaling 1.25 million next month. It is interested in protecting these receipts against a drop in the value of the pound. It can sell 30day pound futures at a price of $1.6513 per pound or it can buy pound put options with a strike price of $1.6612 at a premium of 2.0 cents per pound. The spot price of the pound is currently $1.6560, and the pound is expected to trade in the range of $1.6250 to $1.7010. Biogen's treasurer believes that the most likely price of the pound in 30 days will be $1.6400. a. Calculate Biogen's gain or loss for both the futures and the option for the following spot prices at expiration (per pound rather than per contract) i. 1.625 ii. 1.64 iii. 1.6513 iv. 1.6612 v. 1.7010 b. Diagram Biogen's profit and loss profile for spot prices between $1.61 and $1.71 c. What is Biogen's break-even future spot price on the option contract? On the futures contract? 2. The following graph represents the hedging options for an accounts payable in British pounds. Give the correct hedging decision for each of the following risk and expected spot price scenarios: a. Risk averse and expected spot at expiration is $1.44 b. Risk averse and expected spot at expiration is $1.50 Risk averse and expected spot at expiration is $1.57 d. Risk tolerant and expected spot at expiration is $1.44 Risk tolerant and expected spot at expiration is $1.50 f. Risk tolerant and expected spot at expiration is $1.57 C. e. spot at expiration is $1.57 Accounts Payable in British Pounds Strike = $1.50, call premium = $.0177, put premium = $.0284, forward $1.4882 -1.35 1.42 1.43 144 1.45 1.46 1.47 1.49 1.49 1.5 -1.4 1.51 1.52 1.53 1.54 1.55 -1.45 Cost of Accounts Payable -1.5 unhedged buy fwd buy call -1.55 -sell put -1.6 Spot Price at Expiration
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