The table above indicates that a 1-year call option on euros at a strike rate of $1.25/
Question:
The table above indicates that a 1-year call option on euros at a strike rate of $1.25/€ will cost the buyer $0.0632/€, or 4.99%. But that assumed a volatility of 12.000% when the spot rate was $1.2674/€. What would that same call option cost if the volatility was reduced to 10.500% when the spot rate fell to $1.2480/€?
Pricing Currency Options on the Euro A U.S.-based firm wishing to buy or sell euros (the foreign currency) A European firm wishing to buy or sell dollars (the foreign currency) Variable Variable Spot rate (domestic/toreign) Strike rate (domestic/foreign) Domestic interest rate (% pa) Foreign interest rate (% pa) Time (years, 365 days) Value $12480 $1.2500 1.453% 21 87% Value 0.8013 0.8000 2.187% 1.453% 1.000 365.00 10 500% $0.0461 $0.0570 1.000 Days equivalent Volatility (% pa) Call option premium (per unit fc) Put option premium (per unit fc) 365.00 10.500% 0.0366 0.0295 European pricing) Call option premium (%) Put option premium (%) 3.69% 4.56% 4.57% 3.68%
Step by Step Answer:
Pricing Currency Options on the Euro A USbased firm wishing to buy A Europea...View the full answer
Fundamentals of Multinational Finance
ISBN: 978-0205989751
5th edition
Authors: Michael H. Moffett, Arthur I. Stonehill, David K. Eiteman
Related Video
A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price. For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses. It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.
Students also viewed these Corporate Finance questions
-
Today, the spot rate of the euro is $1.20. The one-year forward rate is $1.16. A one-year call option on euros exists with a premium of $.04 per unit and an exercise price of $1.17. You think the...
-
Buffelheads stock price is $220 and could halve or double in each six-month period (equivalent to a standard deviation of 98 percent). A one-year call option on Buffelhead has an exercise price of...
-
The current price of United Carbon (UC) stock is $200. The standard deviation is 22.3 percent a year, and the interest rate is 21 percent a year. A one-year call option on UC has an exercise price of...
-
Every human being fears to fail. This is the same case with the leaders. Most of the leaders are afraid of some things, but failing is the most feared among all of them. The loss of direction among...
-
Initially, some NWC managers questioned whether the new facility expansion was necessary, especially since it results in increasing net fixed assets from $500 million to $700 million (a 40%...
-
Following is a molecule model of aspirin (acetylsalicylic acid). Identify the hydribization of each carbon atom in aspirin, and tell which atoms have lone pairs of electrons (gray = c. red = O, ivory...
-
If the actual labour rate is higher than the standard labour rate and the actual labour hours are lower than the standard hours allowed, the labour variances will be as follows: a. Tabour rate...
-
Given the following information, prepare in good form an income statement for Jonas Brothers Cough Drops. Selling and administrative expense $ 328,000 Depreciation expense 195,000 Sales 1,660,000...
-
A manufacturing company is shipping a certain number of orders that need to weigh between 185 and 186 pounds in order to ship. Use the dot plot below to answer the following questions. . 185 185 1...
-
A countershaft carrying two V-belt pulleys is shown in the figure. Pulley A receives power from a motor through a belt with the belt tensions shown. The power is transmitted through the shaft and...
-
Trident Corporation entered into a 3-year cross-currency interest rate swap to receive U.S. dollars and pay Swiss francs. Trident, however, decided to unwind the swap after one year-thereby having...
-
What would be the premium expense, in home currency, for a Japanese firm to purchase an option to sell 750,000 U.S. dollars, assuming the initial values listed in the FX Option Pricing workbook?...
-
The average time to handle a call in the Call-Nowait call processing center has a specification of 6 1.25 minutes. The loss from a mishandled call is $12. A sample of 25 calls was drawn from the...
-
Prepare the year end adjusting entry for the following The supplies inventory at the beginning of the year was $7,350. Supplies costing $22,150 were acquired during the year and charged to the...
-
A linear resonant actuator (LRA) is a type of vibration actuator that is used to create vibration in a cell phone or game controller. One type of construction for such an actuator is on the right...
-
Heliotropic Inc. provides accounting services to firms. The company's total charges to customers include two rates: (a) direct labor hour and (b) support services which are charged at $85 per direct...
-
A company's outstanding stock consists of the following: 20,000 shares of cumulative 10% preferred stock with a $10 par value. 150,000 shares of common stock with a $2 par value. During its first...
-
one of the most wonderful recent developments in America workplace is the emphasis many leader are now placing on both themselves and their fellow workers to display emotional intelligence. the most...
-
Sketch the graph of a function that satisfies the given conditions. f(0) = 0, f'(2) = f'(1) = f'(9) = 0, f'(x) < 0 on (, 2), (1, 6), and (9, ), f'(x) > 0 on (2, 1) and (6, 9), f"(x) > 0 on ( , 0) and...
-
You are standing on the top of a building and throw a ball vertically upward. After 2 seconds, the ball passes you on the way down, and 2 seconds after that, it hits the ground below. a. What is the...
-
Your company is considering two mutually exclusive projects, X and Y, whose costs and cash flows are shown below: The projects are equally risky, and their cost of capital is 12%. You must make a...
-
Your company is considering two mutually exclusive projects, X and Y, whose costs and cash flows are shown below: The projects are equally risky, and their cost of capital is 12%. You must make a...
-
After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide whether to go ahead and develop the deposit. The most costeffective method of mining gold is sulfuric...
-
Presented below is selected financial information for two divisions of Crane Brewing. Supply the missing information for the lettered items. Contribution margin Controllable margin Average operating...
-
On April 6, 2022, Ben purchased a house to use as residential rental property. He made extensive repairs to the house and had it ready for rent on July 5, 2022. He began to advertise the house for...
-
Due to the sluggish economy, the Wheels Company has experienced some difficulty in selling its bicycles. The following data relate to the current year: Sales 9,000 units x $100@ $900,000 less:...
Study smarter with the SolutionInn App