Suppose, Alcan a US based firm having some of their specific product input purch
ID: 1171110 • Letter: S
Question
Suppose, Alcan a US based firm having some of their specific product input purchases from Britian, with an invoice amount of GBP 62500. The goods were expected to arrive by the end of June. On May 28, Alcan’s treasury department initiated an American call option on GBP at a strike price of $1.5610 for a premium of #0.09. The spot rate at the time was 1.5600 USD per GBP. The expiry date is July 26. The amount of invoice is GBP 62500 a. Can the option be exercised on May 28 to make a gain? b. On expiry, suppose the spot rate is USD 1.5310 per GBP, would Alcan exercise the option? What could be the resultant gain/loss?
Explanation / Answer
a. Yes, since it is an American option the option can be exercised at any moment uptill 26 July
b. Gain = 1.5610 - 1.5310 - 0.09 = -0.06 $ per option
so a loss of 0.06$ per option
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.