AMan entersd into a contract with UK manufacturing company to deliver 25 trucks on 1st January...

AMan entersd into a contract with UK manufacturing company to deliver 25 trucks on 1st January 2019 payment to be made within two months from the date of delivery. The exchange rate in spot market on the date of transaction is OMR 0.47456 = 1 GBP. The total cost of 25 trucks amounts to GBP1, 250,000. The truck was delivered on 1st May 2019. Assuming that the forward contract price of OMR is at a forward premium of 7% for 1st July and the spot rate of OMR is expected to appreciate by 5% against GBP by July 2019.

a. Find out the amount of OMR to be paid by the dealer if he goes for forward contract.

b. Find out the amount of OMR to be paid by the dealer if he goes for actual price in July

c. If the dealer has an option to buy the GBP in July at 3 % depreciated value of OMR from

January spot rate with 5 % premium, should he accept the option. If he accepts the options find out the amount of OMR paid by him and the difference between option price and actual price

Solutions

Expert Solution

Cost of 25 trucks = GBP1,250,000

Current spot rate = OMR 0.47456 = 1 GBP

Forward contract price of OMR is at a premium of 7% , thus forward rate = 0.47456 * (100%-7%) = 0.441341

Spot rate of OMR expected to appreciate by 5% against GBP in Jul-19, thus expected spot rate in Jul'19 = 0.47456 * (100%-5%) = 0.450832

a. the amount of OMR to be paid by the dealer if he goes for forward contract.

Forward rate = OMR 0.441341/GBP

GBP value = GBP1,250,000

Amount of OMR = GBP1,250,000*0.441341 = OMR 551,676

b.the amount of OMR to be paid by the dealer if he goes for actual price in July

Expected spot rate in Jul'19 = OMR 0.450832/GBP

GBP value = GBP1,250,000

Amount of OMR = GBP1,250,000*0.450832= OMR 563,540

c. If the dealer has an option to buy the GBP in July at 3 % depreciated value of OMR from January spot rate with 5 % premium, should he accept the option. If he accepts the options find out the amount of OMR paid by him and the difference between option price and actual price

Current spot price = OMR 0.47456 = 1 GBP or 2.10722 GBP (1/0.47456) per 1 OMR

Thus, Option price of GBP = current spot price * (100%+3%) = 2.10722*(103%) = 2.170432

Amount of OMR paid under option = GBP1,250,000/2.17043 = OMR 575,922.74

Difference between option price and actual price:

Actual price = GBP1,250,000 * current spot rate = GBP 1,250,000* 0.47456 = OMR 593,200

Option Price = OMR 575,922.74 + option premium = OMR 575,922.74 + (GBP1,250,000/2.17043*5%) = OMR 575,922.74 + OMR 28,796.14 = OMR 604,718

Since the option price is more than actual price and also the higher than the forward rate and the expected spot rate, the dealer should not go for the option.

jeff jeffy answered 1 year ago

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