Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Solution 1Purohase an AUD PuEUR Call Option Expiry Date: 2015-01-14 (four months) Value Date: 2015-01-16 Strike 120.6910 (at-the-money two) Strike 2: 0.6860 (50 pips out-of-the-money

image text in transcribed
image text in transcribed
Solution 1Purohase an AUD PuEUR Call Option Expiry Date: 2015-01-14 (four months) Value Date: 2015-01-16 Strike 120.6910 (at-the-money two) Strike 2: 0.6860 (50 pips out-of-the-money (0TM)) Premium 1 2.13% of AUD face value (~146 AUDIEUR pbs) Premium 2: 1.81% or AUD face value (~124 AUDIEUR pips) This solution gives you the light but not the obligation to buy EUR and set AUD at the stake rate on the expiry date. 0n the expiry date. ii the prevailing spot AUDIEUR is below lhe strike rate, then you will exercise the ltght to deal at the higher strike late. Conversely, it the prevailing spot AUDIEUR rate is higher than the stltke rate, then you will let the option lapse and buy EUR against the AUD in the spot market at the higher rate. I have provided you with two prices so you can see the relationsh'p between premium and strike prices. Solution 2AUDIEUR Collar OptionBuy an AUD PuUEUR Call and Sell an AUD CaIIIEUR PutZero Premium Expiry Date: 2015-01-14 (four months) Value Date: 2015-01-16 B Put Strike: [1.6860 (50 pips below the FEC) S Cal Strike: 0.6942 B Put Strike: 0.6810 (100 pips below the FEC) 3 Cal Strike: 0.6983 This solution locks you into a range whereby you have a worst-case rate (bought put strike) and the capacity to participate in favourable AUDIEUR movements up to the sold call strike. ldealy, the worst-case rate would be your budget rate. I have provided you with indicative pricing on two collar structures so that you can compare two different ranges. Remember, a collar structure is an alternative to an FEC; therefore, when assessing participation benets, use the FEC rate as the benchmark, not the spot rate. Solution 3AUDIEUR Knock-In ForwardBuy an AUD PutlEUR Call and Sell an AUD CalllEUR Put with Up-and-ln TriggerZero Premium Expiry Date: 2015-01-14 (four months) Value Date: 2015-01-16 B Put Strike: 0.5390 (20 pips below the FEC) 3 Cal Strike: 0.6390 with up-and-in knock-in trigger at 0.7140

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access with AI-Powered Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Multinational Management

Authors: John B. Cullen

6th edition

1285094946, 1285094948, 9781285696744 , 978-1285094946

Students also viewed these Finance questions