Question

1. A U.S. firm has payables of £250,000 in nine months. The U.S. purchases a call option on the pound. The strike price is $62/£ and the premium is $.06/£. What is the total dollar amount paid for the pound payable if the spot rate in nine months is (Multiply any $/£ amount by £250,000)

• $1.51/£       

• $1.61/£       

• $1.70/£

• $1.78/£       

Answer 1

If the spot rate in 9 month is $1.51/£

The call option will not be exercised since the current spot rate of $1.51/£ is lower than Strike price of $1.62/£. The Dollars would be converted at $1.51/£

Dollar amount paid = Pound payable amount * Exchange rate

Dollar amount paid = £250,000 * $1.51/£

Dollar amount paid = $377,500

If the spot rate in 9 month is $1.61/£

The call option will not be exercised since the current spot rate of $1.61/£ is lower than Strike price of $1.62/£. The Dollars would be converted at $1.61/£

Dollar amount paid = Pound payable amount * Exchange rate

Dollar amount paid = £250,000 * $1.61/£

Dollar amount paid = $402,500

If the spot rate in 9 month is $1.70/£

The call option will be exercised since the current spot rate of $1.70/£ is higher than Strike price of $1.62/£. The Dollars would be converted at $1.62/£

Dollar amount paid = Pound payable amount * Exchange rate

Dollar amount paid = £250,000 * $1.62/£

Dollar amount paid = $405,000

If the spot rate in 9 month is $1.78/£

The call option will be exercised since the current spot rate of $1.78/£ is higher than Strike price of $1.62/£. The Dollars would be converted at $1.62/£

Dollar amount paid = Pound payable amount * Exchange rate

Dollar amount paid = £250,000 * $1.62/£

Dollar amount paid = $405,000