In: Finance
The premium on a June 17 British pound call option with a strike price of $1.2560 when the spot rate is $1.2620 is quoted as $0.02. The time value of this option is.
The premium on a June 17 British pound call option with a strike price of $1.2750 when the spot rate is $1.2620 is quoted as $0.025. The intrinsic value of this option is.
Your firm has an accounts receivable worth C$200,000 due in six months. The firm buys 2 June 16 Canadian dollar put options with a strike price of $0.9750 at a premium of $0.0075 to hedge against the exchange risk. If the spot rate in June settles above the strike and current interest rate dollar 2%, the outcome of the hedge will be exactly $193,483. Yes or no? explain>
Manual work, not excel
Premium $0.02
Strike Price $1.2560
Spot rate $1.2620
Intrinsic value =Strike price – spot price
1.2560-1.2620= -0.006
Time value of option = Premium – intrinsic value
0.02-(0.006)
Time value of option =$0.026
Premium $0.025
Strike Price $1.2750
Spot rate $ 1.2620
Intrinsic value= Strike price – spot price
1.2750-1.2620
Intrinsic value = $ 0.013
Yes, outcome of hedging will be $193483
Explanation
Our firm has C$ 200000 receivable after six month .So to hedge itself firm buy put option with strike price of $0.9750 at premium of $0.0075
Premium $0.0075*200000= $1500
$ interest rate=2%
Opportunity cost = 1500*1.01=1515
If option exercises = 200000*0.9750=195000
Outcome= 195000-1515=$193485
However if the spot price after six month rises above strike price the option should not be exercise.