Question

Options

1. You are to receive €125,000 in 3 months and today’s spot price is $1.17, but the 3 month forward rate is $1.19. If a (put or call?) option (€125,000) cost $1,500 what is the least you will receive for selling your euros (net of the option cost) for dollars? (You buy the put for $1,500 and exercise it by selling the euros at $1.19 if the market price of the euro is less than $1.19.) Give answer is total dollars and in dollars per euro.

2. You are to pay €125,000 in 3 months and today’s spot price is $1.17, but the 3 month forward rate is $1.19. If a (put or call?) option (€125,000) cost $1,500 what is the most you will pay for buying your euros (net of the option cost) with dollars? Give answer is total dollars and in dollars per euro.

3. You are to receive €145,000 in 3 months and today’s spot price is $1.17, but the 3 month forward rate is $1.19. A (put or call?) option (€125,000) cost $1,500. In 3 months the spot (market) price on the euro is $1.16. What is the least you will receive for selling your euros (net of the option cost) for dollars? (You buy the put for $1,500 and exercise it by selling the euros at $1.19 if the market price of the euro is less than $1.19.) Give answer is total dollars and in dollars per euro.

4. You are to pay €145,000 in 3 months and today’s spot price is $1.17, but the 3 month forward rate is $1.19. A (put or call?) option (€125,000) cost $1,500. In 3 months the spot (market) price on the euro is $1.16. What is the most you will pay for buying your euros (net of the option cost) with dollars? Give answer is total dollars and in dollars per euro.

Futures

5. You are to receive €145,000 in 3 months and today’s spot price is $1.17, but the 3 month forward rate is $1.19. You enter into a futures contract (€125,000) to sell euros at the $1.19 forward price. In 3 months the spot (market) price on the euro is $1.16. What is the net amount you receive for selling your €145,000? Give answer is total dollars and in dollars per euro.

6. You are to pay €145,000 in 3 months and today’s spot price is $1.17, but the 3 month forward rate is $1.19. You enter into a futures contract (€125,000) to buy euros at the $1.19 forward price. In 3 months the spot (market) price on the euro is $1.16. What is the amount you pay for buying your €145,000? Give answer is total dollars and in dollars per euro.

Answer 1

1	Assumption - It is assumed that spot rate after three months is less than $ 1.19. Else put option will not be used.
	Total Dollar receive			125000 * 1.19		148750
	Option Cost					1500
	Net Received			A		147250
	EURO			B		125000
	$ / EURO			C=A/B		1.178
2	Assumption - It is assumed that spot rate after three months is more than $ 1.19. Else call option will not be used.
	Net EURO payable					125000
	Net $ payable			125000 X1.19		148750
	Option Cost					1500
	Total Dollar Payable			A		150250
	EURO			B		125000
	EURO / $			C=A/B		1.202
3	Assumption -
As Spot rate after three months is 1.16 hence option will be exercised. Further option is available for 125000 hence for differential 20000 Euro another contract will taken.
	Total Dollar receive			145000 * 1.19		172550
	Option Cost			1500* 2		3000
	Net Received			A		169550
	EURO			B		145000
	$ / EURO			C=A/B		1.1693
4	Assumption -
As Spot rate after three months is 1.16 hence option will not be exercised. Further option is available for 125000 hence for differential 20000 Euro another contract will taken.
	Net EURO payable					145000
	Net $ payable			145000 X1.16		168200
	Option Cost			1500* 2		3000
	Total Dollar Payable			A		171200
	EURO			B		145000
	EURO / $			C=A/B		1.18
5	Assumption -
As Spot rate after three months is 1.16 hence option will be exercised.
	Total Dollar receive			145000 * 1.19		172550
	Net Received			A		172550
	EURO			B		145000
	$ / EURO			C=A/B		1.19
6	Assumption -
As Spot rate after three months is 1.16 hence option will not be exercised.
	Net EURO payable					Amount
	Net $ payable			145000 X1.16		168200
	Total Dollar Payable			A		168200
	EURO			B		145000
	EURO / $			C=A/B		1.16